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Economy | US | Asia-Pacific

Delaying Additional Tariffs Enough to Lift Short-Term Sentiment

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US-China reach a verbal agreement on the first phase of a deal during trade talks last week. While the ceasefire may not be a long-term solution, it may be good enough for markets in the short-term.

 

Partial agreement

  • First phase of the agreement has managed to avoid 5% additional tariffs (from 25% to 30%) on US$250bn of Chinese exports to the US which were scheduled to kick in on Oct 15. However, there was little on the December tranche of tariffs (15% on US$160bn) and roll back of existing tariffs.
  • In exchange, China has agreed to increase agricultural purchases from the US to US$40-50bn with a two year lead time. This would be more than double the US$20bn that China imported in 2017.

 

Not quite a deal

  • President Trump said that he and Xi may sign an agreement next month at the APEC Leaders Summit in Chile. However, China’s response did not mention such potential signing.
  • China’s official response to last week’s talks has been somewhat wary, neither referring to the talk progress as a “deal”, nor mentioning agricultural purchases or the currencies.
  • Issues over Intellectual Property Protection, forced tech transfer and market access are likely to feature in the next phase of negotiations. Huawei and other sanctioned entities were also not mentioned in the latest agreement.
  • While uncertainties remain, the markets are likely to take “no additional tariffs” as a major positive in the short-term, while looking ahead to further talks over the longer term.

 

 

  • US equities rallied strongly last week to post positive weekly returns for the first time in three weeks, with trade optimism surrounding the rally. Asia’s Monday morning trading session has seen equities trading up and a fairly muted but risk-positive response in Asia FX. The Asia Dollar Index (ADXY) is up 0.65% (from early Friday levels) with the Chinese yuan continuing its advance from Friday (USDCNY fell 0.92% during the same period).

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