Stock Markets Rise as Trade Talks Scheduled for October

Stock Markets Rise

President Trump’s tweet about trade talks set to resume between the U.S. and China might have been wishful thinking, but this particular wish has now been granted.

There has been a lot of back and forth in the stock markets over the last month as it fended off concerns about the economy possibly weakening too much, worry about falling treasury yields, and of course, the lack of progress on what has turned out to be a long and arduous road to a trade agreement with China.

Over this time, markets have traded in a distinct range, between the lows that occurred as a result of the tension created by the escalation of the trade tariff war that happened in early August to its attempt to come back in the second week of the month, which we tried and failed to get past several times since.

On Thursday, we put that range behind us, for now at least. While we’re only over it by a percent or so, this is at least a start to getting back to the all-time high levels set in mid-July, and we’re more than halfway there now from where we were on August 26.

Earlier in the year, when the two sides in the trade dispute were still talking, some were expecting that a deal might even be imminent, but we now know that the rift was a lot bigger than some may have thought. In spite of talks set to resume next month, it still might be.

In spite of the two sides remaining pretty far apart on some of the issues, the next step is getting back to the negotiating table and not conducting the campaign from afar, trading financial missiles sent across the Pacific.

While it would be much truer to describe this as the countries exploding bombs within their own borders, as this is who tariffs are aimed at, it does appear that we’ve reached a threshold of damage or are at least coming close to this, so talking again is the next logical step and a welcome one.

Every time we see a new development in this battle, we get to see again just how big of a deal this is to the markets, which shouldn’t really surprise us. Markets, and stock markets in particular, tend to overdramatize things and over-react a lot to developments, and will do so with both apparently good and apparently bad news.

Thursday’s news ended up adding 1.41% to the Dow, 1.3% to the S&P 500, and 1.75% to the Nasdaq, but all of the session gains came during the first 40 minutes of trading as the markets digested this new development. While many things can weigh in on market index levels, this one was clearly due to the news about the upcoming talks and markets gave back some of this as the day went on, but not a considerable amount.

We also got to see how much this news is affecting treasury markets, as the yield on the 10-year leapt 10 basis points Thursday to close at 1.57%. This is not the tail that is wagging the stock market, as the trade war itself is wagging both the stock market and the bond market’s tails here.

Both stock markets and bond markets are concerned with this trade deal, and progress is good for stock markets but bad for bond markets, and this is one case where we do see outflows from the bond market to the stock market and elsewhere. When things look bad on the trade front and the economic front, the opposite happens, where money moves from stocks to bonds, which is normal given that people flee to bonds anytime stocks look riskier and look to stocks more than things look better.

This dynamic occurs within the bigger ones that moves both markets, where the flight toward U.S. treasuries have been a result of people wanting to own more U.S. paper than anything, with any inflows or outflows involving stocks being more of a sideshow. The trade war is a major event for both markets though and while they haven’t really moved together all that much during these times, when something like this occurs that materially affects the prospects of the trade dispute, you can count on both markets being influenced somewhat.

Talking Again is a Good Thing, but a Lot Remains to be Worked Out

The two countries meeting in October won’t be going into the game cold though, as the sides expect to “conduct conscientious consultations” in the meantime. Some of the issues that remain unresolved look plenty challenging, such as the U.S. objecting to China investing in technologies such as robotics, which China has not surprisingly taken exception to.

This will be a difficult issue to resolve, as China is looking to help themselves narrow the technological gap they have with the West, and if they are ever to do this, they will have to invest in it. Having another country look to prevent them from helping themselves this way may serve American interests by looking to restrain future competition, but does not serve the interests of the Chinese nor the interests of the free market or economics, and there is a real potential for an impasse here because it’s hard to imagine China giving in very much if at all on this issue.

The goal of an economy is to maximize productivity and then place what is produced in the hands of end users in an efficient of a manner as possible, but seeking to increase productivity is at the heart of the matter. This is where economic growth comes from, the economic growth that we all know and love, and China’s economic growth matters as well, whether we live there or anywhere else in the world.

The world is a better place as a result of the efficiencies of production that China has brought us, and while that means less efficient producers get squeezed out to some degree, we all reap the benefits by being able to get more value when we buy these more efficiently produced goods. It is counterproductive to economics to look to interfere with this, just like it is counterproductive to levy tariffs and restrict trade between countries.

China Has Shown it Will Bend, the U.S. Needs to Show They Will as Well

It’s pretty clear that, among the two combatants, China has shown a greater desire toward conciliation and compromise, but this has a limit and we’ve obviously exceeded their tolerances, otherwise we’d have an agreement now. The U.S. will need to bend a lot more than they have thus far for this matter to be finally settled, and there is some real doubt that we may see this happen anytime soon.

What we will need to realize is that it is better for everyone that both countries be permitted to zealously pursue increases in productivity, and the fact that the U.S. prefers a more private sector approach to this while China sees their central government playing a more active role should be seen as outside the scope of trade negotiations and within the realm of political debate.

We have no standing to debate politics in China of course, although this is not so obvious to many, and the natural tendency is to see our way as right and anyone deviating from this as in need of remediation. China has sure come a long way over the past few decades in becoming more Westernized, but their system is still pretty distinct from ours in some ways, ways that they have chosen and are entitled to choose.

This issue is not a matter of subsidizing industries, which the United States engages in pretty unabashedly, and having that artificially lower the cost of production to be used as an advantage in trade. This is all about research funding, and trying to protect a current market advantage by seeking to have China self-impose restrictions upon themselves as to how much progress they will be allowed to make.

This may not seem like all that big of a roadblock at first glance, but given that protecting the interests of American business is the prime objective on the U.S. side, this issue may end up being a thorn in the side of any potential agreement. The ball is squarely in the U.S. court with this one and they will have to back down on this otherwise we may never see a trade agreement reached.

We might be getting a little too excited about these upcoming talks actually, as the is plenty to be worked out and some issues are still a long away from being resolved, including this one. You start by talking though and there will be more of that at least.

John Miller

Editor, MarketReview.com