Time for a new hat. With the Fed on pause and four major trade deals locked and – mostly loaded — … [+]
Get your Dow 30,000 party hats on, because there is little in the way of the U.S. stock market reaching all time highs. Thank the Fed.
And thank President Trump and his trade team for locking down at least three trade deals that satisfy Wall Street’s big money power players — the U.S. Mexico Canada Agreement, and the Korea and Japan bilateral agreements. Not to mention the bigger market mover that came on Friday — the phase one China mini-deal.
That said, investors can add China to the list of stock markets with strong tailwinds. What is stopping the MSCI China from beating its highs reached in April? Not much.
“With the Fed removed from the field now, I don’t see much of anything stopping growth or risk taking. The market should respond positively to these obstacles to growth being removed for now,” says Vladimir Signorelli, founder of investment research firm Bretton Woods Research, a spin off of the late supply sider Jude Wanniski’s firm Polyconomics.
Surprise! President Trump called the phase one deal a “great deal”. The devil is in the details. … [+]
The phase one trade deal is still a work in progress, but it has a positive tilt to it.
Is there any reason not to buy China? Even if both sides take all of the first quarter to iron out specific details, how bad can it be? The biggest risk to phase one is if the hard liners take over the table, then trade talks sour and China investors start selling.
“In looking at both official statements about the deal, there is a degree of coherence and consistency there,” says Craig Allen, president of the U.S. China Business Council. “What would really worry me is if we had very different interpretations of the agreement, but that doesn’t seem to be the case. The Chinese seem to think it is an important agreement. From what I gather, they’re saying that they know it will cause some disruptions, but is important that it is implemented,” Allen says.
China has reneged on three other deals during Trump’s tenure.
This one is supposed to be signed by the end of January. Once signed, some China products facing 15% tariffs will be reduced by half to 7.5%.
Global trade has been slipping because of the U.S. China dispute, adding to economic uncertainty, … [+]
Just over two years ago, President Trump went to China following Xi Jinping’s visit to the U.S., the first foreign head of state to visit in Trump’s early presidency. The meetings were billed as two authoritarians — one a real authoritarian, the other more of a media creation — getting along and all was well. The market assumed there would be no trade war.
They were wrong. In 2018, Trump imposed the first set of tariffs on Chinese imports — mostly steel and aluminum goods. By last September, nearly half of everything China shipped to the U.S. had tariffs of anywhere from 15% to 25%. Trump had bipartisan support for the trade war.
Since then, financial markets have been buffeted between cycles of tariff escalation and de-escalation in the deteriorating relationship between the world’s two largest economies.
But on Friday, Trump handed Beijing a major concession, cancelling the December tariffs on roughly $130 billion worth of Made in China consumer goods, while promising to cut existing tariffs if China abides by its promises on intellectual property, technology transfers in joint venture deals, currency rules, and imports of U.S. goods.
“This should put to rest for the time being the trade war volatility factor in markets,” says Eleanor Olcott, a China analyst at TS Lombard, an independent investment research provider.
Joint statements from the U.S. and China say it will cover four broad areas focused on reducing the goods trade deficit; an agreement not to purposely weaken the yuan; improved IP protections; and greater access to China’s financial markets for financial services firms.
This time, as Allen noted from the U.S. China Business Council, there were no major discrepancies between the U.S. and Chinese statements as there have been on previous occasions.
It is unclear whether Beijing has finished with translating the U.S. document, and putting it all through the legal wringer.
“Both sides have gone out on a limb,” says Allen. “It seems unlikely they will walk this one back. I think we are at a new stage.”
Investors think so. The XTrackers China CSI-300 (ASHR) exchange traded fund, which invests in the A-shares, is up 1.55% on the first full phase one trade deal trading day.
China’s stock market has been one of the most hope-filled markets around. It’s Shanghai and Shenzhen listed shares, known as the A-shares, are up over 30% year-to-date, making it the best performing large emerging market.
Mainland investors cheered solid economic data released in China today, too. Growth sectors outperformed the market. The Shenzhen Composite Index broke through a small resistance level at 1,660 to settle at 1686.41 as momentum in mid and small caps continues apace.
“I expect to see upward revisions to China’s 2020 economic and corporate earnings forecasts from many Wall Street firms,” says Brendan Ahern, CIO of KraneShares, a China ETF company.
The mini-deal may require a slight modification of one’s outlook from both a top-down China economy level and bottom-up company earnings level, Ahern believes.
Lastly, China’s higher month-over-month November industrial production numbers and higher than consensus retail sales suggests the economy can hit its 6% growth target for 2019, something China bears have been betting against.
“There has been a positive change in tone,” says Ahern.
The bull case on phase one is a moving target. Political risk can pull the rug out from under the deal. If so, Dow 30,000 will be harder to reach. But China’s chances of reaching 12-months highs becomes less likely.
The KraneShares Bosera MSCI China A-shares (KBA) exchange traded fund: trying to reach its all time … [+]