Aussie equities rallied on Monday on news that a break in the US-China trade war could be imminent. But the future remains far from certain for the global economy.
The US government has agreed to suspend a tariff hike on $250 billion of Chinese goods meant to be implemented this week in exchange for China buying $50 billion in goods from American farmers, a deal that US President Donald Trump described as “phase 1.
“The deal I just made with China is, by far, the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country,” the president tweeted.
The deal, which may be signed at the APEC summit in November, also included provisions on how China should manage its currency. The US has previously accused China of “weaponising” the renminbi by allowing its value to drop in order to make exports cheaper.
The deal signifies a thaw in relations between the two countries and while Trump has prematurely announced breakthroughs before, this time it might be the real deal.
“This time I think there’s a little bit more reason to be optimistic,” AMP chief economist Shane Oliver told Investor Daily.
“Both sides are under more economic pressure because their economies have been slowing, there’s increasing talk of recession in the US, the labour market is still solid, but there are some signs that it may be starting to weaken… US presidents don’t get re-elected when unemployment is rising or the economy is slowing dramatically.”
However, there is no indication as of yet that this will represent a generalised turnaround in the trade war.
“The deal, given it is quite minor in scope and scale, represents what is likely to have been the only deal that both parties could agree on,” Ben Goodwin, portfolio manager at Merlon Capital, told Investor Daily.
“The harder stuff, particularly that relating to tech IP and ‘Made in China 2025’ (China’s plan to start producing higher quality goods and services), is effectively deferred and may ultimately prove too hard, at least under the current leadership regimes.”
Mr Goodwin says that if the deal does hold he expects oil to stabilise, with “positive implications” for the price of oil. The need for looser monetary policy would decline, with a corresponding decrease in the appeal of gold.
But the future remains uncertain.
No existing tariffs have been removed, while a round of 15 per cent tariffs is still planned for December.
There is also no indication that the US will remove Chinese companies from their supply blacklists, and Chinese consumer confidence, which has dropped sharply in recent months, is unlikely to rise with the ceasefire.
Trump is fighting a war on multiple fronts, facing impeachment at home and global outcry following his decision to abandon Kurdish allies in Syria.
The announcement of a breakthrough in trade talks is just what he needs.
It also remains unclear whether China will actually follow through on the demands. Depending on the outcome of the election, it might not matter.
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