January 15, 2020 / 7:32 PM / 3 days ago

Instant View: Signed U.S.-China trade deal removes one risk factor for markets

(Reuters) - U.S. stocks pared early gains but closed at record highs on Wednesday after the United States and China signed a Phase 1 trade deal that ended 18 months of uncertainty and will roll back some tariffs and boost Chinese purchases of U.S. goods and services.

Chinese Vice Premier Liu He is handed a pen by U.S. President Donald Trump after signing "phase one" of the U.S.-China trade agreement during a ceremony in the East Room of the White House in Washington, U.S., January 15, 2020. REUTERS/Kevin Lamarque

Wall Street had suffered spasms of risk aversion since President Donald Trump launched his tariff war in early 2018, with traders cueing off headlines from both countries, even as the stock market ground to new highs in recent months.

China has agreed to increase purchase $76.7 billion worth of U.S. goods in the first year of the deal, with $123.3 billion slated for the second year, according to the text of the agreement released on Wednesday.

MARKETS

STOCKS: The S&P 500 .SPX closed at a record high of 3,289.3, up 0.19%

BONDS: The 10-year U.S. Treasury note US10YT=RR was little changed after the details of the deal were released, and was last yielding 1.7864%. The 2-year note US2YT=RR yielded 1.5577%

Dollar: The .DXY was 0.14% lower

COMMENTS:

CHRISTOPHER NIXON COX, GLOBAL STRATEGIST, BRIGHTSPHERE INVESTMENT GROUP, GRANDSON OF FORMER PRESIDENT RICHARD NIXON, WHO FIRST OPENED TIES WITH CHINA IN THE 1970S

“Longer term, the really thorny issues of state sponsored capitalism have been pushed off for later discussion, probably after the election. This is a win for China as it will be much easier to negotiate with a lame duck president … In the short term, this will move the focus off the USA China trade dispute. Trump will now turn his attention to European trade.”

THOMAS DONOHUE, CEO, U.S. CHAMBER OF COMMERCE

“This deal provides much needed certainty to American businesses as they begin the new year … When fully implemented, China’s commitments will create a better environment for U.S. exporters and investors and begin the process of rebalancing the economic relationship between the United States and China. We hope this deal will usher in a new era of trust between both countries and pave the way for Phase 2 negotiations to begin in a timely manner.”

CHUCK CARLSON, CHIEF EXECUTIVE OFFICER, HORIZON INVESTMENT SERVICES, HAMMOND, INDIANA

“The market typically looks forward so there was already built into it that something would be signed. I am sure as people dissect it, there is going to be criticism of it — it’s not doing enough, or it’s not doing this, or whatever. But the market, had it not gotten signed and blown up at the last minute, the market would have reacted negatively to it.”

“I don’t think today’s positive market is so much a function of the signature of the document, as much as we’re in corporate earnings season and that’s going to be the driver of stocks here.”

“Whether somebody looks at this as big progress or little progress, it is something tangible and so the arrow is pointing in a direction that the market is comfortable with.”

SHAUN OSBORNE, CHIEF FX STRATEGIST, SCOTIABANK, TORONTO

“It’s not exactly a sell the fact kind of reaction, not much of a reaction at all to the trade deal signing. The fact that we have this thing in the back now should clear up some risk and uncertainty for the markets. We think it may be more broadly a bit more negative for the U.S. dollar, because the dollar has done relatively well out of the uncertainty element that this protracted trade war has caused. We think that’s contributed quite significantly to the dollar’s performance over the last year and a bit more. So, at the margin we think it’s a dollar negative from an fx point of view, but there’s really not much reaction to speak of at all in the markets right now.”

MICHAEL LORIZIO, SENIOR FIXED INCOME TRADER, MANULIFE INVESTMENT MANAGEMENT, BOSTON

“Anytime you have key parties in the same room, that’s a good thing and we’ve seen the Treasury market at least not at the lowest levels it reached during the most worrisome parts of the negotiations. But I don’t think there is any expectation that this Phase 1 will serve as a catalyst to materially enhance growth for either country in the near term” because it does not cover some of the thorniest trade issues.

“I’m sympathetic to the administration’s stance that to begin the negotiations is the toughest part and that’s great. But I think the market wants to see that play out in a bit more detail before factoring it into future models.”

“For the Treasury market, to see this causing any inflationary pressures or growth starting to heat up to any significant degree, the market hasn’t been a believer in that.”

JASON PRIDE, CHIEF INVESTMENT OFFICER OF PRIVATE WEALTH, GLENMEDE, PHILADELPHIA (EMAILED)

“The “phase one” trade deal creates a strong contrast between 2020 and 2019, in which the latter saw the imposition of tariffs amounting to ~0.6% of U.S. GDP and the former leading to the walk-back of threatened tariffs and reducing the odds of a material escalation in the near future.”

“ While it does not appear that the “phase one” deal addresses many of the structural issues that started the trade spat, it does mitigate the uncertainty that ongoing trade tensions present, namely the threat of new tariffs at a moment’s notice.”

“In the broad scheme of things, multiple things have been going right at the same time, including this stabilization in trade relations, the resurgence in earnings growth expected for 2020 and more accommodative monetary policy here in the U.S. This has been, and should continue to be, supportive for risk assets barring any major new developments.”

MARVIN LOH, SENIOR GLOBAL MACRO STRATEGIST, STATE STREET GLOBAL MARKETS, BOSTON

“(The trade deal) hasn’t been as entertaining as Brexit, but it certainly is far more important. Ultimately, I don’t think the details that we have are going to change the growth picture to any significant degree. What’s most important to investors is a potential de-escalation and signs that de-escalation will continue this year, which is the outlook period for a lot of investors.

“We’ve seen signs that politics certainly are at play here, they always have been. During an election year if we can somehow take this out as one of the bigger risks that we had all last year, it does give some confidence to the market, not necessarily from an economic but from risk parameter perspective.

“If it does drive some of the animal spirits within the manufacturing space later this year, in terms of taking the edge off, maybe letting corporate CFOs and corporate CEOs plan a little bit better and make capital investments that they haven’t, that would be a positive outcome.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The stock market has rallied substantially and part of that is in anticipation for the signing of this Phase 1 trade deal. And now it happened. Now that it’s history, investors are going to focus on other factors and the biggest factor right now is earnings.”

“There’s no question from a psychological viewpoint it’s a big relief for the market. It’s probably add anywhere from 0.3% to 0.4% to GDP growth. It’s a relief for corporate America. There are still CEOs that are dubious, but this might help capital investments and that was the biggest missing link to the economy over the last few years.”

“Even if the benefits are minimal it’s a relief for corporate America and it clears the way to an increase in capital spending.”

Compliled by Alden Bentley

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