Since October, US-China trade deal optimism has lifted markets, boosting the Dow Jones (DIA) and S&P 500 (SPY) to record highs. Although there have been concerns about the deal’s first phase in the last few days, the Dow Jones and S&P 500 have held their ground.
Phase one of US-China trade deal
Over the last week, there have been mixed reports about phase one of the trade deal. While White House economic advisor Larry Kudlow has said the two countries are “getting close” to a deal, some reports suggest otherwise.
The biggest stumbling blocks in the trade deal’s first phase have been tariffs and farm purchase commitments. Whereas China wants existing tariffs rolled back, Donald Trump has not committed to waiving them. In fact, Trump said yesterday that he would raise tariffs for China if the two countries failed to reach a trade deal. Meanwhile, the US wants a hard commitment from China to increase farm purchases, and not just mere promises.
Hong Kong is another stumbling block in US-China relations. China has accused the US of interfering in its domestic affairs.
The Dow Jones and S&P 500
News about the US-China trade war has been a key driver for the Dow Jones and S&P 500. Yesterday, the Dow Jones and S&P 500 closed almost flat, down just 0.36% and 0.06%, respectively. However, the Nasdaq Composite closed in the green, and US markets were still trading near record highs. US-China trade tensions have weighed heavily on markets since the trade war erupted last year. So why did the Dow Jones and S&P 500 close flat yesterday?
Has the Dow Jones become trade-war immune?
It’s not that the Dow Jones and S&P 500 have suddenly become immune to the US-China trade war. Markets may not be reacting to trade deal obstacles because such posturing is seen as normal in negotiations. Neither side has taken an extreme stance. The general view is that the two countries will eventually make some sort of agreement, especially considering that both economies are slowing down. And with the 2020 election approaching, the last thing Trump wants is a Dow Jones crash. He attaches a great deal of importance to stock market returns and frequently tweets when the Dow Jones or S&P 500 hit a milestone.
That said, the trade deal may not magically solve the economic slowdown, and we could still see a sell-off if trade talks completely break down. To learn more, read US-China Trade War: There’s No Miracle Deal.