The US-China phase trade deal is expected to be signed today at 16:30GMT in the US. The expectations leading into this event have been well priced into the market and we are cautious after the record increases we have seen in the S&P500 and the Dow Jones. This rally in risk assets could well be setting up for a ‘buy the rumour, sell the fact’ response. Furthermore, the latest reports this morning from US Treasury Mnuchin state that US tariffs will stay in place on Chinese goods until there is a Phase 2 agreement. So, this is shaping up to be a trade ‘dud’ rather than a trade ‘deal’.
Look at GBPUSD and how it responded to the UK election results in early December 2019. The GBPUSD currency pair hit 1.35000 on the news that the conservative party had won the UK election results. This was seen as a positive result for the GBP at the time as it broke the then Brexit deadlock. However, the GBPUSD pair sold off after hitting 1.35000 highs?
The rumour was that the conservatives would win the election, so the GBP was bought on that expectation. Once the result came in, and it was expected, there was no other reason left to buy the GBP. The GBP buyers took profit and then the focus went back onto the UK-EU trade relationship. We are expecting a similar response here to the US-China phase 1 trade deal signing, so we are anticipating a fall in US equities and risk-on trade after the signing of the deal.
What will change this outlook?
The outlook will change if there is some extra element of the deal which the market has not seen yet. At the moment the total package of the deal is meant to be around $200bln. That is meant to be around $50bln in energy, $40bln in agricultural goods, $75bln in manufacturing and around $35-40bln in services. So, that is the broad expectations, but this deal has been low on detail and big on hype. So, watch out for a buy-the-rumour type response and we are certainly not getting carried away with the latest record highs in US equities.