A year and a half later, after several heated exchanges and angry tweeting with about 1267 false "talks are going well" tweets, Phase 1 of the U.S./China Trade Deal was officially signed yesterday putting the 18-month battle to rest for the time being. Most spectators are tired of the words "trade" and "deal" in one sentence, as it did little other than provide much angst amongst the investing and physical trading community.
If one were to look back and go through what exactly was promised and scripted prior to any deal and what actually was accomplished, it is quite a mockery of the system -- it was just one big ploy by President Trump to get the Fed to ease rates and convince voters that China could be contained. The deal is signed and goods will be exchanged between the two countries, but this is far from the "big beautiful monster" deal that Trump quoted a while back.
The $200 billion trade deal includes the following: $40 billion a year over two years in agricultural purchase agreements from the Chinese, a pledge to purchase $77.8 billion more in U.S. manufactured goods like cars and machinery, $52.4 billion purchase of oil/gas, and $37.9 billion in financial services. No mention of some of the thornier issues, such as Intellectual Property rights, removal of domestic subsidies, technology theft -- the main hard, pressing issues which were the reason to have the Trade War in the first place would now be left for Phase 2 discussions. It is a win-win for Trump and Xi, but American consumer and companies have borne the cost of $40 billion in tariffs, and the impact was especially felt by the American farmers forced to go bankrupt over the past two years.
If one were to read the fine print and disclaimers in the script of the deal, one can see that there are a lot of loopholes and these are not firm commitments, rather promises: China says it would purchase these amounts if conditions were right. The proof will be to see what is actually bought and sold over the course of the year. The punitive tariffs on $250 billion worth of goods are to remain in place, and Trump only halved the 15% duty on $110 billion worth of goods. Phase 2 would not start until after the election.
In summary, this is just a truce, as Trump has bigger things to focus on this year -- his re-election campaign. If he is re-elected, there is no guarantee that Trump will not lash out at China again, playing hardball as he will have another four years under him. China knows this, which is why they have already started planning since last year.
The year 2019 was one of anxiety and constant tug of war between the bulls and bears, as the market viciously traded in a tight range until the Fall, when it broke away after the U.S. Fed decided to go all-in supporting the repo market and starting the non-QE Treasury bill purchases, in essence start a version of QE4 as they aim to boost economic growth yet again. Add to that the tensions easing, and market broke higher on the free liquidity injection, boosting asset prices even further.
Now with bond yields having eased, unable to break the 1.9% higher on U.S. 10 year, volatility ($VIX) holding the key 12 level and everyone all-in invested in the equity market, the market is searching for its next catalyst to move higher or lower. Currently, we are in a state of limbo as investors eagerly go through Q4 2019 earnings, which will probably come out better than expected, but the S&P 500 has seen its P/E multiple expand over and above its earnings -- a lot of the good news has been priced in.
The next catalyst will be the U.S. Fed FOMC meeting at the end of January, where we need to hear what the Fed has to say about its "temporary" repo auctions, which were meant to fix the year-end plumbing problem. But it seems like daily auctions of around $45 billion are still being submitted and accepted through the middle of January even. If the repo market is indeed broken, then the Fed may embark on a permanent set of repo operations, meaning QE4.
Call it whatever you want, but as long as the Fed is supporting this market and Trump is not willing to risk a down year before November, one would be wise to err on the side of caution going short, but rather offloading longs here, awaiting a better entry point.