Asian markets to rise in relief after US and China declare 90-day ceasefire on trade war

  • Analysts predict a short-term sentiment boost to the markets, but they also fear 90 days may not be enough to resolve all underlying differences for a deal
PUBLISHED : Monday, 03 December, 2018, 7:32am
UPDATED : Monday, 03 December, 2018, 8:21am

Asian markets, the first to begin trading after the leaders of the world’s two biggest economies agreed to halt escalating their trade war over the weekend, are likely to rise in relief on Monday, but analysts fear 90 days may not be enough for Beijing to solve the underlying structural issues to the satisfaction of the US.

The US and China reached a 90-day ceasefire in their trade war on Saturday after a dinner meeting between US President Donald Trump and Chinese President Xi Jinping at the G20 summit in Buenos Aires.

“The markets will be elated,” said Aninda Mitra, senior sovereign analyst at BNY Mellon Investment Management. “I see this is as a short-term risk positive development and safe havens should underperform in coming days. The interlude should see a stronger effort to set a framework for more talks and quid pro quos.”

Ahead of the G20, the US had planned to raise tariffs on US$200 billion of Chinese goods from 10 per cent to 25 per cent from January 1. But the increase has now been put off.

In return, China has agreed to a number of concessions. It will buy a “not yet agreed upon, but very substantial amount of agricultural, energy, industrial and other products” from the US to reduce America’s huge deficit with China, according to a statement by the White House.

“All in all, a slightly better outcome than expected in my view,” said Stephen Innes, head of trading for Asia-Pacific at Oanda. “We should expect the dollar to soften more so against high beta [volatile] currencies, along with providing a fillip to riskier assets including Asian emerging-market currencies and stocks. Thankfully, for risk sentiment, the dinner date ended with a sense of harmony rather trade war discord.”

China’s stock market needs a clean slate at its watershed moment

The trade war has shaken global financial markets this year, particularly in Asia.

China’s Shanghai Composite Index has fallen more than 20 per cent so far this year. Hong Kong’s Hang Seng Index and South Korea’s Kospi have both lost more than 10 per cent. In Tokyo, the Nikkei 225 is in negative territory, but by a modest 1.8 per cent.

Tom Orlik, chief economist for Bloomberg Economics, expected the news to be positive for China’s growth, and for other countries in the Asian manufacturing supply chain.

All in all, a slightly better outcome than expected in my view
Stephen Innes, head of trading for Asia-Pacific at Oanda

Tariffs at 25 per cent would have meant a 0.9 percentage point drag on China’s GDP growth. But keeping tariffs at 10 per cent will mean the drag stays at 0.5 percentage point, he predicted.

But doubts remain among market watchers because of the large ideological gap between the two countries and the absence of a concrete road map to resolve the many differences, which might prevent them from reaching an agreement in such a short time.

According to the White House statement, the two countries have 90 days to work out their differences on issues about China’s economic practices, including forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.

If the talks fail on structural reforms, the 10 per cent tariffs will increase to 25 per cent.

Bloomberg Economics’ Orlik is sceptical that serious structural problems can be resolved in such a short time.

BNY’s Mitra said he was worried that the US would go back to feeling “aggrieved, or promise-fatigued”, at the end of 90 days, if any structural promises from the Chinese falls short yet again.

“I remain mindful of the broadening bipartisan scepticism on the US end about its worsening relationship with China.”

Now for the hard part: making good on China’s truce promises

On the China front, there is also a growing wariness about an eventual conflict, and possibly, outright hostility, against the US, he said.

“The Chinese views are also coalescing around the notion that the US will simply not tolerate another nation to rise, to the extent where US hegemony in Asia can be seriously challenged.

“My concern is that ... the Chinese will feel short-changed that the US pockets the tactical concessions and does not make much effort to understand their different development model, which limits the degree to which they can totally alter their growth model simply to satisfy the US.”

Innes from Oanda said he was concerned about the lack of official communique to provide a concrete road map to the trade war resolution.

“With so many rooted risks in play with no clear-cut viable contingencies, play booking an outcome was near impossible,” he said.