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Market Optimism about a US-China Trade Deal Could Be Short-Lived

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Apr. 3 2019, Published 10:34 a.m. ET

Market optimism about a US-China trade deal

Optimism about a trade deal between the United States and China has been a major driver of the year-to-date rally in the markets. The Fed’s shift to a dovish stance after a dismal fourth quarter has played a major role in the rally.

In the first quarter, the S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite Index (QQQ) rallied 13.0%, 11.1%, and 16.5%, respectively. FAANG stocks Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOG) rose 27.2%, 20.9%, 18.6%, 33.2%, and 13.3%, respectively, in the quarter.

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While the Fed’s stance now seems to be firmly in the bulls’ favor, the same can’t necessarily be said about the ongoing US-China trade negotiations. There have been several instances in which the markets have celebrated the progress on the talks only to give back those gains after comments from either side have indicated that a deal is still far off.

Markets rejoice

The two countries are meeting again starting today for what will be the sixth round of trade talks since US President Donald Trump and Chinese President Xi Jinping agreed on a truce to resolve their trade issues.

Today, investors are celebrating as media reports suggest that the United States (VOO) and China (FXI) are nearing a trade deal. According to an article in the Financial Times, Myron Brilliant, the executive vice president and head of International Affairs at the US Chamber of Commerce, said, “We’re getting into the end-game stage.” He added, “Ninety per cent of the deal is done, but the last 10 per cent is the hardest part, it’s the trickiest part and it will require trade-offs on both sides.”

Sticky issues are still around

While a trade deal would be a cause for celebration, the markets shouldn’t lose sight of the fact that most of the obstacles that have been preventing the deal for months are still around. In February, a deal seemed close, but the momentum soon faded.

While Chinese companies have been hurt by the country’s slowdown, US companies Apple, NVIDIA (NVDA), and Caterpillar (CAT) have also admitted that the slowdown is having a negative effect on their earnings. A final deal will depend on the concessions each country is ready to make.

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