US and China Reaching Consensus on “Phase 1”

Alan Penny

26 November 2019

2 min read

China US trade war represented by chess pawns

  • Tariffs continue to be major sticking point
  • Markets not as convinced
  • Phone call overnight “productive”

There have been reports recently that the United States and China are struggling to reach any type of agreement when it comes to Phase 1. However, several Chinese officials have since come out to deny this. The latest is Gao Lingyun, an official close to the trade talks, who said the two sides are moving closer to closing the initial deal phase soon.

Lingyun also noted that the two sides have even agreed to roll back tariffs as part of this phase. However, there were different opinions regarding which tariffs were to be removed and by how much.

Markets reacting less and less

As traders, we have witnessed the markets get slammed in both directions in response to the latest news on the China-US trade talks. Lately, though, we are starting to see less movement based on these headlines.

perhaps the market is finally trading less on rumor and conjecture and more on reality

These shifts also tend to last less than previously observed. This is a good sign, because perhaps the market is finally trading less on rumor and conjecture and more on reality, which is much easier to deal with.

Markets will need to figure out whether they are reacting because of exhaustion or through simple lack of belief. If there is a significant lack of belief, but this leads to the United States and China reaching some consensus on the trade deal, then that suggests there might be a very good setup for global equities.

Most recent phone call “productive”

The most recent phone call overnight between Liu He, Stephen Mnuchin, and Robert Lighthizer was characterized as being “very productive”. In the end, both sides were more or less in agreement when it came to looking at the common concerns and reaching a consensus on how to resolve related problems. Further phone calls are expected in the short term a good sign that the two sides are in fact trying to work towards each other.

This makes sense as we start to head towards an election year in the United States. Plus, the Chinese economy has certainly felt the pinch from the trade war. As a result, both sides have a mutual interest in at least getting things moving forward.

It also appears that the market is becoming less sensitive to the headlines, because there aren’t that many people out there left to react to what we have seen.

Many Wall Street experts are now suggesting that the Phase 1 deal has already been priced into stock markets, so that is something to pay attention to. Even though talks seem to be moving in the right direction, a shock to the downside would probably be much more violent than any good news at this point, as far as markets are concerned.

Written By
Alan Penny

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