Let’s take stock of US-China trade talks

What is the sentiment like at the moment surrounding US-China trade talks?

I remember questioning the sincerity of the more optimistic risk mood last month when China started to endlessly talk up chances of a trade deal across all media platforms.
It almost felt as if it was too good to be true and like it was too forceful since they have always been more reserved all along upon the conclusion of each phase of trade talks.
Well, look at where we are now. The mood has certainly made a complete U-turn with China staying eerily quiet and the only thing they’re willing to offer is that they had “constructive” talks with the US on trade over the weekend.
It feels like we’re reverting back to old habits again, that is before the round of trade talks in Washington last month.

Are we still on track for a “Phase One” deal?

Well, this is the million dollar question for every trader isn’t it?
It is what is keeping markets somewhat paralysed although US equities are continuing to squeeze out all-time highs over the past few sessions. But is that justified?
Let’s dive into the headlines above to try and wrap our heads around the issue.
If you notice, the only positive remarks recently have all come from US officials with the Chinese camp basically offering nothing for markets to chew at in recent weeks.
That to me, is quite a tell that something is amiss here and that there has to be some sticking point in negotiations that is preventing both sides from reaching a deal.

What is this sticking point?

At the moment, all we have are reports suggesting that China is unwilling to put a firm commitment on agriculture purchases to the US – at least not $50 billion worth.
For some context, that is almost double what China has imported from the US in terms of farm products back in 2017 i.e. $27 billion.
To try and compromise on the matter, China also wants more tariffs to be removed with the end goal of having all tariffs off the table as both countries move towards a longer-term trade resolution in the coming months/years.
However, the current tariffs are the US’ main leverage in trade talks so if they give in this early, they will have little to fight back against China on future demands.
Hence, that is resulting in the supposed impasse in trying to get to a “Phase One” deal.

Does a “Phase One” deal matter at all?

At this stage, it is more symbolic than it is going to be the deal that helps revive global trade and the global economy next year.
Markets have pinned quite a lot of hopes that this will be the start of potentially something more optimistic between the two countries but this is more of slowing down or pausing tensions because the contents of the deal offers little.
China will not be making firm commitments on more structural changes such as those seen in the “seven deadly sins” in this deal.
So, while a “Phase One” deal helps to provide some relief that things may not escalate next year, it doesn’t take away the fact that we are still far from any kind of significant long-term resolution between both countries.

Where do we go from here?

With US equities at all-time highs, it essentially underscores the fact that the risks to trade talks at the moment are skewed towards the downside.
If a “Phase One” deal is signed, sure that’s great but as mentioned above, it’s merely keeping tensions on ice – which is what China wants to help take pressure off its own economy while Trump wants it to help boost his election bid.
However, if talks break down, there is going to be quite a significant correction in markets with the likes of gold and the Japanese yen set to benefit strongly.