Is a harmonious conclusion to the six-month-long US-China trade battle finally within reach? Or this just a ploy to push US stocks higher ahead of an election that will decide which party controls Congress for the balance of Trump's term?
That's the question that traders will be asking themselves as they try to suss out the implications of a Bloomberg report claiming that President Trump has asked his cabinet to begin drawing up the terms of a deal following a "long and very good" conversation with Chinese President Xi Jinping on Thursday - the first phone call between the leaders of the world's two largest economies in months. According to Bloomberg, Trump has asked key cabinet secretaries to have their staff draw up a draft deal that he hopes will signal an end to the trade conflict, BBG's anonymous sources said. What remains unclear is whether Trump will drop the list of demands that have reportedly been a sticking point in negotiations since the spring. Among those demands are that China scale back state support for its 'Made in China 2025' initiative, drop policies that support the siphoning of intellectual property from foreign companies and reduce the country's trade surplus with the US.
Predictably, the news ignited a torrid rally in Asian shares, with the Hang Seng Index rising 4.2%, the biggest gain since 2011, while the Shanghai Composite Index climbed 2.7% to cement its first four-day winning streak since February. The Chinese yuan, meanwhile, traded back below 6.9 to the dollar, while US stock futures moved higher, signaling that shares could be on their way to a fourth straight day of gains.
Analysts were split on their interpretation of the news. Some believed that the rash of downbeat forward guidance that helped trigger the 'Shocktober' market rout had finally inspired the president to try and quash the trade beef.
Tuuli McCully, head of Asia-Pacific economics at Scotiabank in Singapore, called the news "encouraging." It "likely reflects the fact that businesses in the U.S. are starting to feel the impact of the trade conflict through higher prices and squeezed margins," she said.
Others insisted that the news was a ploy and that, if anything, deal talks remain in preliminary stages.
The telephone conversation on Thursday was Trump and Xi’s first publicly disclosed call in six months. Both sides reported that they had constructive discussions on North Korea and trade, with Chinese state media saying that Trump supported “frequent, direct communication” between the presidents and “joint efforts to prepare for” the planned meeting on the sidelines of the Group of 20 summit, which is scheduled to take place from from Nov. 30 to Dec. 1.
SocGen's Kit Juckes noted the possibility that the talk of trade war peace is nothing more than Trump "cynically driving up equity indices."
"Either President Trump is paving the way for a trade deal being agreed at the Buenos Aires G-20 summit later this month, or he’s cynically driving up equity indices ahead of U.S. mid-terms," said SocGen FX strategist Kit Juckes. "What’s for sure, is that talk of a trade deal has added further juice to the last few day’s risk appetite."
Sean George, Stockholm-based CIO at Strukturinvest, manager of the Hamiltonian Global Credit Opportunity fund, agreed that the rally sparked by the report would be a "short-term tactical play."
"For us at Hamiltonian, we view this as a short-term tactical trade. We are cognizant of the elections on Tuesday, and the cynic in me says maybe this is being done for votes."
Another economist argued that both Chinese President Xi Jinping and President Trump could benefit from even the perception of a trade detente.
- "October data confirmed China is slowing, and markets were searching for conviction on whether the government can engineer a soft landing given domestic and external stress," says Trinh Nguyen, senior economist in Hong Kong
- "Since then, that fear has receded on conjecture that we may have a stronger policy signal from China to provide support for the economy, and today we have both Trump and the Chinese government signaling potential progress to ease trade tensions."
- "At this critical juncture for both the US and China, there is an alignment in timing. For China, it is prioritizing stabilizing domestic sentiment, and for Trump we have Nov. 6 mid-term elections."
- "Whether the positive words will culminate into actual action remains to be seen, but at the moment, the timing of a possible deal appears to be a great reprieve for not just the two largest economies but also global prospects and risk appetite."
Meanwhile, the South China Morning Post is reporting that the meeting between Trump and Xi on the sidelines of the G-20 summit in Buenos Aires, tentatively scheduled for Nov. 29, has been rescheduled and expanded into a "meeting plus dinner" on Dec. 1.
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We now wait for Trump economic advisor Larry Kudlow to pour cold water on the report during a Friday morning interview.