Chances of a deal are lowering. But how will Stocks Trade if It Happens?
In the past one year, the focus among traders has been on trade. This is primarily because the US and China have been having a trade war.
This war has continued to escalate as the two biggest economies continue to flex their muscles.
On Friday, the US escalated this war after it announced plans of delisting companies from China. On this, the US has valid concerns, especially on corporate governance of Chinese companies.
This announcement came a few days before the two countries are scheduled to restart negotiations on trade.
The default thinking among traders is that a trade deal will be a good thing for markets. They believe that a deal will lead to more trade, which will help to salvage the declining global economy.
However, traders are now starting to question all this.
Could a US-China deal be relevant for traders?
Last week, an analyst on CNBC poured cold water on the impact of the trade war. He argued that a deal will not lead to significant trade.
The question is, will a trade deal have any impact on stocks?
A week ago, House Speaker Nancy Pelosi announced that congress will start the process of impeaching Donald Trump. This decision will lead to more deadlock in congress, which means that it will be unlikely for any major laws to be passed.
As we speak, the USMCA deal that Trump negotiated has not been negotiated on because Democrats fear giving Trump a win. This is despite the fact that most American businesses support the deal.
Therefore, an impeachment threat could give China a upper hand when it comes to investigating the Trump administration. China could ignore any deal and hope that Trump will either be impeached or removed in the coming election.
Remember, China looks at the next 100 years while a US president looks at the next 4 years.
How will stock markets will react?
Another concern that traders should have is on whether a deal will have any major impacts on stocks.
In the short term, an announcement of a trade deal with China could have positive impacts on stocks.
This is simply because the market is mostly a psychological place. It is a place where emotions, rather than fundamentals determine the movements of the market.
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However, in the longer term, there is a likelihood that stocks will not have major movements. This is primarily because We expect nothing major to change in the deal that will be announced.
China will not start buying a lot of US goods simply because the US does not produce a lot of goods. Before the trade war started, China used to be the biggest purchaser of American agriculture products.
→ 5 Key Assets to Watch as China and US Trade War Continue
What more will the US sell to China?
Another thing. China will likely not agree to the measures the US has asked. For example, the country will not accept the US argument that it steals American technologies. In addition, China has moved from being the world’s factory to being the world’ biggest consumer.
At the end, we expect that China could give up responding to US president as they wait for a more favorable president. In this, China might be willing to take some short-term pains for long-term gains.
Second, we expect that stocks will jump if the two countries announce a deal. This jump will then fade as investors look at the bigger picture.