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Market Already Priced in Phase One Deal

As expected, US President Trump and Chinese Vice Premier Lui He signed the Phase One US/China trade deal. As we had expected, deal covers issues including as intellectual property protections, technology transfers, food and agricultural purchases, financial services, exchange rate and transparency, expanding trade, bilateral evaluation and dispute settlement. China agreed to buys over 2 years $40bln in services, $50bln Ag, $50bln in Energy and $75bln - $80bln in Manufacturing.


As US officials had indicated overnight, Trump announced that the US would be keeping tariffs on Chinese imports until a Phase Two deal has been agreed upon, otherwise the US would have no cards to negotiate with moving forward. Phase Two negotiations will begin right away, Trump said.


Other than the above, the Press Conference itself delivered little interesting new information. Trump spent the majority of the time either self-congratulating or praising his closest allies and friends in what at times felt like more of a celebrity award ceremony than one celebrating the conclusion of import trade negotiations. However, he did hint that the USMCA deal should be sorted by next week and he would soon be visiting China to reciprocate for the deal.


AUD, NZD rallied in anticipation of the event, which marks the end of an 18-month trade war with the US that has been a drag on Chinese growth, the largest trading partner of both Australia and New Zealand. US stocks rallied also rallied, while the USD dropped, in anticipation of the event, although by the time the post-signing press conference began, the move had largely petered out.


Focus now turns to Phase Two negotiations. According to sources, the Chinese are not optimistic about the prospects for a deal. China’s popular Global Times, citing sources close to China’s Ministry of Commerce, reported that the signing of the Phase One deal may not lead to Phase Two talks any time soon and that trade tensions, additional tariffs and US investment restrictions on China will become the “new normal”. Existing tariffs imposed by the US on Chinese imports will not be removed in the short-term, the sources also reportedly said.

Should these sources be correct, the markets extended risk on the positioning could be at risk over the medium term. The gold & JPY bears will be hoping for as much anyway.

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