Markets Rally a Bit Tuesday as Trade War Outlook Improves

US China Trade War

Tuesday’s market moves weren’t exactly dramatic, and stock markets spent the first part of the day in the negative. China being more accommodating did brighten the mood at least.

Tuesday didn’t start out as a stellar day for U.S. stock markets, as the first half of the day was anything but memorable if you rooting for the bulls. The Dow was down over 60 points at mid-day and the bears jumped on this, where we heard in news stories that this is a flight to safety as they call it, with both bonds and gold up again.

It might be hard to imagine how all-time records paint such a grim picture. If we just look at the performance of assets that can compete with stocks at times such as bonds and gold, we’re not getting the whole picture and not even looking at what really matters when you’re wondering about the performance of stocks, which is of course, the performance of stocks.

This apparent flight to safety was short-lived though, as markets rallied during the second half of the trading day to not only make up for these early losses but finish about that much in the green. A third of a percentage point gain is not all that meaningful, but neither is a third of a point loss we had earlier.

If and when we really get a flight to safety, we’re going to see a lot more of a decline than a third of a point off of all-time highs. The month of May produced a lot larger loss than this, 20 times as large in fact, but that wasn’t a flight to safety either, it was more the market needing to collect itself and take stock of where we are really heading, and it turned out that it saw some fairly blue skies which manifested into a June recovery.

The only real major concern out there right now is a further escalation of the trade war between the U.S. and China, and the events over the weekend did serve to reduce these fears. The hope was that the situation would de-escalate and it did, and the markets applauded that.

While there is still quite a way to go yet to reach a deal, the talks became stalled, at least in the opinion on the American side, due to China not being accommodating enough and actually backtracking a bit.

May’s dip in the markets, where we gave back about 6% of the gain that we made so far this year, was mostly about the trade war deteriorating, where we not only reached an impasse but saw the war take a turn for the worse with even more gunfire.

We ended up making all of that back and a little more without an improvement on this front, which is very good news for the market and allows further advances to be made should this situation improve once again. It now has.

A cease fire in a war is certainly better than no cease fire, meaning more trade escalations, and we know that Donald Trump is more than capable of raising his bets should he decide it is in his interest to do so. Having both sides agreeing to stand pat for a while is therefore quite encouraging in itself, but this still leaves us with the issue of needing to get an agreement done.

Chinese Premier Li Adds Very Promising Remarks

China stepped up on Tuesday and offered an olive branch of sorts, and it is they and not the U.S. that had the ball in their court because their lack of bending enough is what stalled the talks. This is not to say that they had to do this, but if they expected Trump and Co. to reach out and do something like this, they would have probably waited a long time.

Chinese Premier Li made some very encouraging remarks at the World Economic Forum which were quite business friendly to the U.S., and that’s exactly what everyone wanted to hear. In China, while the President heads up the country, the Premier heads up the government, and when you get the Premier acting friendly, that does count for a lot.

Premier Li addressed some concerns that have been seen as troublesome to the American side, including China becoming more of a market economy, a greater commitment to intellectual property, and their no longer looking to devalue the Yuan to achieve what is seen as an undue benefit to the Chinese and a trade penalty to the U.S.

China is now planning on opening up investment by foreigners sooner than expected, in 2020 instead of 2021. Li also remarked that “we are showing the world we are determined to open up the services sector and the pace will only be accelerated.”

This is Good News for the Trade War and Welcome Words Overall

This is music to the ears of both American investors and American business, and this goes well beyond just looking to improve the situation during this current trade war. China is now the world’s second largest economy and opening it up more, and allowing the market greater free reign while limiting government intervention to only what is necessary, as Li told us his plan is now, is good news indeed.

Li’s remarks were described by conference attendees as both “strong” and “substantive.” These are indeed two good words to use here, although we could add another one, “encouraging.”

It is not that China’s economy hasn’t been on a course toward becoming more of a Western-style market economy, but to see their Premier tell us that they are really looking to step this up more is a real step forward. As much as China’s economy has grown, they will only realize their full economic potential by improving their trade relations with the West as well as welcoming more foreign investment, and when they tell us that they understand this, this is indeed encouraging.

This latest news is actually more rally-worthy than the cease fire over the weekend, and we haven’t really appreciated it enough yet. However, given that this is helping to lay the groundwork for an actual trade deal, it may have its day yet.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.