U.S./China Trade Agreement: Phase 110-15-2019 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 10/11/19. Rates and Economic Calendar Data from Bloomberg as of 10/11/19. 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 last week higher in the aggregate after retreating for three consecutive weeks. In the U.S., the S&P 500 Index rallied to a level of 2970, representing a gain of 0.66%, while the Russell Midcap Index fell 0.83% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, followed suit with its own decline of 1.00%. On the international equities front, developed markets moved 2.31% higher, while emerging markets gained 1.53%. Finally, the 10 year U.S. Treasury yield finished out the week higher at 1.76%, after a previous string of weekly declines.
For over a year now, and what feels like a decade, we’ve discussed the ongoing trade dispute between the U.S. and China. If you’ve followed along you know that progress has been prematurely reported on several occasions, which has led equity markets to rally higher only to inevitably selloff. Naturally, we have reservations that this could happen again, but for the time being it appears that “Phase 1” of a multi-phase trade agreement has been reached. As of Monday morning, it has been reported that the U.S. has reached a verbal agreement with China, referred to by President Trump as “Phase 1”, though several media reports suggest that China may want to discuss further later this month.
So what does a potential “Phase 1” of this agreement entail? While nothing official has made its way into writing just yet, it appears that the U.S. will forgo implementing a planned October 15th tariff increase on Chinese goods, while China agrees to increase purchases of U.S. agriculture, offer more currency transparency, and allow U.S. financial services firms greater access to the Chinese market.
“Phase 1” is undoubtedly a step in the right direction, but it is our understanding that it is void of any mention of the intellectual property and forced technology transfer issues that are of core importance to the U.S. While we would expect those concerns to be hashed out in a future phase of the agreement, we don’t currently expect them to be concluded in the immediate future.
After nearly a year and a half of discussions between the U.S. and China, it is fair to say that negotiations rarely go according to plan and the time-frame for a final conclusion remains unclear. As a result, 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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