Promising News on Trade Front Spurs Stock Markets

Steve Mnuchen

Encouraging news emerges on both sides of the trade battle between the U.S. and China. China appears ready to talk, while the U.S. may be relenting a little on tariffs.

Many believe that the impasse in trade discussions between the United States and China is weighing down attempts for markets to further recover from losses in the latter part of last year. Today, we got a taste of this after encouraging remarks from both sides of the battle.

U.S. stock markets surged for a time after it was learned that U.S. Treasury Secretary Steven Mnuchen expressed a desire to consider rolling back the increases in tariffs on Chinese goods that resulted from the ongoing trade dispute with China.

While the response was an over-reaction of sorts, and things did settle in more once the initial buying frenzy was over, this was enough to propel U.S. markets forward for the third straight day.

The Dow ended the day up 0.67%, the S&P 500 gained 0.76%, and the NASDAQ Composite grew by 0.71%, indicating that the gains in these indexes were quite broad based.

Mnuchen did indicate that the idea lacks support from some other U.S. officials, including U.S. Trade Representative Robert Lighthizer, the lead negotiator on the American side. His decision is therefore not necessarily a decisive one, and more will be known as the situation unfolds and further talks occur between the two countries.

China Set to Send Vice Premier Liu to Washington

China also announced today that it will be sending its lead spokesman on economic matters, Vice Premier Liu He, to Washington on January 30-31 to discuss ways to resolve the dispute. This also bodes well for positive change in the trade negotiations, which thus far have produced little more than rhetoric and retaliation.

The Americans are particularly concerned about China’s technological ambitions, which will no doubt be a topic at the summit. The fact that the Chinese are sending the person who heads up such things in their country does suggest that they are indeed serious and are not just looking to trade barbs, which can be done quite efficiently these days through the media and the internet and does not require a personal visit.

We knew from the night that Donald Trump was elected president that U.S./China trade relations were in for a battle, and while the Trump administration did soften its protectionist stance somewhat since then, we have of course seen the result of these views manifest.

Any sign that a resolution may be in sight, or at least a de-escalation of the matter, is welcome indeed by the markets, who generally are pro-trade.

Asian markets, who had more time to digest all of the news on the trade front, also responded positively to the news. The Shanghai Composite, Hong Kong’s Hang Seng, Tokyo’s Nikkei, Seoul’s Kospi, and Sydney’s S&P-ASX 200 all put in nice gains in the shadow of all this.

It makes sense that Asian markets would particularly welcome such news, and all markets in Asia ended up getting in on the positive momentum this has created. Markets in Europe are also expected to have a good day as well due to this improved trade outlook.

U.S. markets are also up in after-hours trading, although much of this has already been digested by American stock indexes. While we may not see quite as much bullish follow through tomorrow, it seems that right now the sellers are laying low in after-market trading and this can mean that the bulls may come out on top yet again tomorrow.

Asian Markets Particularly Sensitive to U.S./China Issue

Several Asian companies that are particularly sensitive to tariffs did particularly well, like Apple suppliers AAC (+5.25%) and Sunny Optical (+6.99%). Apple itself has quite a bit on the line as well, although less so than their Asian suppliers, although Apple did gain 0.59% on the news.

Not all Asian technology stocks who are suppliers to Apple were so rosy though. Nidec fell by 1.13% after they announced that they are reducing their earnings forecast due to weaker demand from China due to the tariff war. Fellow Apple supplier Taiwan Semiconductor dropped 0.91% after they announced concerns of weakening smartphone demand overall.

These results do show that things like the slowing economy overall and the strained trade relations between the U.S. and China are weighing on business performance, something most are only too well aware. The hope though is that the potential for improved trade relations that were expressed today on both sides will help mitigate the economic damage that this is causing.

China will be releasing some key growth figures next week, and this could weigh upon the market, but on the other hand, China’s struggle with this is well known, and there may not be that much of a surprise involved in this provided that the numbers are fairly in line with the current view.

China’s possible response to this is more key, and we’ve already heard that they are considering taking action, although we’ll need to see more than just talk to make a real difference.

In other Asian news, Japan released their inflation figures for December, which came in lower than expected at 0.3%, down from 0.6% the previous month. This should serve to give the Central Bank even more pause for thought as they deliberate whether to increase interest rates.

Stock markets want both growth and lower interest rates, but rising interest rates is particularly troublesome, so that appears to be shelved somewhat in Japan for a while at least based upon these numbers.

John Miller

Editor, MarketReview.com

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