US-China Phase 1 Signing: Deal or Dud?

A year and a half after launching his trade war against China, the US President Donald Trump will sign a deal to ease trade tensions on Wednesday. 

15 January, 2020 – HYCM – The US-China phase trade deal is expected to be signed today at 16:30 GMT in the US. The expectations leading into this event have been well priced into the market and I am cautious after the record increases we have seen in the S&P500 and the Dow Jones.

What to expect from US-China phase 1 trade deal

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? Why if it was positive for the GBP? Because it was a buy the rumour sell the fact response. See the chart below:

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.

I am expecting a similar response here to the US-China phase 1 trade deal signing, so I am anticipating a fall in US equities and the risk-on trade post the signing of the deal.

What will change my outlook?

My 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. $40 bln 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 I am certainly not getting carried away with the latest record highs in US equities.


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