Global markets rallied yesterday after an apparent truce in the trade war between the US and China, leaving some investment commentators to suggest conditions for a ‘Santa rally’ are now in place. 
The past year has been dominated by the trade tariffs unleashed by the US administration as part of president Donald Trump’s ‘America First’ agenda. While areas such as the European Union and Canada were threatened with tariffs, much attention has been put on China – which has been the main target of Trump.
On 6 July, the Trump administration placed tariffs on $34bn worth of Chinese goods, leading China to hit back with retaliatory tariffs on the US. In September, the US escalated the trade war by applying tariffs to $200bn of Chinese imports; China hit back with tariffs on $60bn of US goods.
There was a positive development yesterday, however, after the two countries appeared to agree to a truce in the trade war.
Following a dinner meeting between Trump and Chinese president Xi Jinping at the G20 summit in Buenos Aires, the US said it would delay its plan to raise tariffs on $200bn of Chinese imports from 10 per cent to 25 per cent for 90 days while China agreed to purchase a “very substantial” amount of US goods, including farm, energy and industrial products.
The market rallied in response but Randeep Somel, director of global equities at M&G Investments, highlighted the fact that the exact details of the tariff truce are still thin on the ground.
“So far we only have confirmation that a 90-day truce will take place so both sides can talk before any new tariffs are added. However, it is a positive development as all rhetoric so far has been towards continued escalation,” he said.
“We also have president Trump’s tweet, though the Chinese have neither denied nor confirmed the news, that the Chinese will ‘reduce and remove’ the 40 per cent tariffs on US car imports and the US will freeze levies on $200bn of Chinese goods at 10 per cent.”
Aninda Mitra, senior sovereign analyst at BNY Mellon Investment Management, pointed out that the move seems to be a positive, but added that more details are needed to determine their true value and, in any case, the truce does little to solve the real issues.
“I would see this is as a short-term risk positive development and safe havens should underperform in coming days. The markets will be elated. However, I would look out for the details and keep an eye on the 90 day-plus horizon,” he said.
“To be sure, underlying problems remain unresolved. It is not as though existing tariffs are on the verge of being unwound. But what Xi has managed to extract from Trump is a stay on any escalation for three months. That interlude should see a stronger effort to set a framework for more talks and quid-pro quos.”
However, it is not a foregone conclusion that these future talks will be successful. Mitra added that “the best one can hope for” at the end of the three-month truce is a trade and geopolitical deal in which a roadmap is established for China to raise oil and agricultural imports from the US to cut the bilateral surplus between the two nations.
M&G’s Somel added that the US appears to be negotiating from a position of relative strength with China. The US economy and employment are very strong, while the Republican party held control and increased seats in the US senate, suggesting the population broadly supports Trump’s trade negotiations with China; China, on the other hand, is facing slowing growth as the authorities attempt to manage the amount of debt in their economy.
“Whilst its very early days and the process of normalising the trading relationship with China is going to be a complex process – [this] at the very least is a signal that those negotiations can begin,” the manager said.
“Riskier assets such as base metals and oil producers, as well as the US and European car manufacturers and associated supply chains are likely to show the most positive reflection of the news as they have borne the brunt of the negative headlines for most of this year.”
Neil Wilson, chief market analyst at Markets.com, argued that the truce, regardless of its long-term outcome, seems to have set the stage for markets to have a strong December – commonly known as a ‘Santa rally’.
“December is starting with a bang, with a de-escalation in Sino-US tensions positive for risk. Some be concerned that there was no official word from China in relation to auto tariffs and that the two sides are saying different things about the meeting,” Wilson said.
“Nevertheless, when both sides can claim they won, it’s usually good for sentiment. This is all shaping up to be positive for equities and other risk assets. Following the Powell put last week, this is the second key ingredient for a strong December rally for global equities.
“This positive rhetoric and mood music is likely to be sustained through December as the two sides seek a deal, which is likely to mean we see a decent Santa rally through December. With Dow futures regaining the 26k handle I would not be surprised to see the bull market assert itself again and for the Dow to end the year at 27k.”
“In spite of the recent sell-off in equities there looked to be just enough appetite for one last hurrah and we may be about to see it.”