U.S./China Trade Agreement: “Phase 1” Reportedly Reached
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 12/13/19. Rates and Economic Calendar Data from Bloomberg as of 12/13/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets finished higher for the week, led by emerging market equities, which surged following the announcement of a U.S./China trade agreement. In the U.S., the S&P 500 Index pushed to a level of 3,169, representing a gain of 0.77%, while the Russell Midcap Index gained 0.36% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 0.30% over the week. On the international equities front, developed markets jumped up by 1.72%, while emerging markets,as previously mentioned, sky-rocketed 3.63% higher. Finally, the 10-year U.S. Treasury yield finished the week at 1.82%.
It has been a little under two years since the United States implemented 30% tariffs on all solar panel imports and 20% tariffs on all washing machine imports on February 7th, 2018. In hindsight, this would mark the beginning of the U.S/China tariffs saga, which gradually escalated over the subsequent 22 months, gripping the attention of capital markets along the way. Despite a myriad of false reports claiming progress over the tenure of negotiations, we’re pleased to announce that it appears a “Phase 1” deal has been agreed upon by both parties pending documentation execution, according to formal statements delivered by each respective country.
The deal comes at an opportune time as the U.S. had been scheduled to implement a 15% tariff on additional imports of approximately $160 billion in Chinese goods, almost all of which were consumer goods, on December 15th. As part of the deal, the U.S. agreed to forgo implementation of the December 15th tariffs entirely, and cut tariffs on $120 billion of imports that had been initially implemented on September 1st from 15% to 7.5%. Meanwhile, the Chinese reportedly agreed to purchase additional U.S. goods, agricultural products in particular, over the next two years and cancel plans for further tariff implementation.
It is important to note that the bulk of the existing tariffs that have been placed on Chinese imports by the U.S. remain in place. In fact, of the $500 billion of Chinese goods imported to the U.S each year, tariffs remain on about $370 billion of those imports, a potential bargaining chip for the U.S. as negotiations for the next phase of the U.S./China trade agreement presumably begin. While this agreement doesn’t entirely remove one of the significant risks facing investors in 2020, it does indicate that increased risk from further tariff escalation is unlikely.
Regardless, there’s always a risk that negotiations go sideways, or reverse completely, which is why we continue to encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
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