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Is the US/China Phase One Deal About to Die?




Sentiment regarding the state of US/China relations continues to dominate price action. 


As we talked about in a blog last Friday, US President Trump gave sentiment a boost when he announced US counter-measures in response to China’s passing of stricter security laws governing Hong Kong.


Trump announced that the US would be stripping Hong Kong of its “special status” and would be taking steps to sanction the region, as well as Chinese officials involved in eroding the autonomy of Hong Kong from China. (China has this morning said they will retaliate to this, we do not yet know what the retaliation will be).


However, Trump did not go as far as canceling the Phase One trade deal between the US and China - fears that Trump would go this far had clearly been weighing on sentiment all of last week, given how risk assets rallied in wake of the press conference.





This morning, amid continued optimism following Trump’s “not as hawkish on China as he could have been” press conference last Friday, risk assets had been trading in the green. 


However, further negative headlines regarding the Chinese response to the US stopped this optimism in its tracks (US equities are now flat, USD is off lows, AUD is off highs). 


According to Bloomberg citing sources, China is to halt some US soy imports as tensions between the two countries rise. According to the sources, government officials have informed state-run agricultural companies to pause purchases of some US farm goods, which would include soybeans, as an evaluation into the escalating trade tensions is made. Additionally, an unspecified number of US pork orders have been canceled. 


Remember, Chinese imports of US agricultural goods make up an important part of the Phase One US/China trade deal, with Soy the most important product. By pausing these purchases, is China in effect canceling the trade deal? The risk that this might be the case is why we saw the market react negatively to this news and why we may see markets continue to react negatively to similar news over the coming weeks. 


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