Treasury Secretary Steven Mnuchin may have just given the market a “shot in the arm” it so desperately needed to stay afloat. After he hinted earlier this morning that the trade war could be ending soon, investors roared in approval.
The Dow jumped a healthy 50 points, led by trade war-sensitive companies like Apple and Intel – both of whom stand to gain a great deal if a truce is made between the U.S. and China.
“We were about 90% of the way there [with a deal] and I think there’s a path to complete this,” said Mnuchin in an interview with CNBC today.
The last 10% to be accounted for wasn’t revealed, but he’s confident that progress will be made at the upcoming G-20 summit in Japan, where Presidents Trump and Xi plan to meet.
More intriguing, however, was a recent report from Bloomberg News, who found that according to “sources”, the U.S. is willing to suspend tariffs on $300 billion worth of Chinese goods should trade talks merely continue.
If Bloomberg has it right, a deal doesn’t even have to be finalized for the tariffs to temporarily evaporate.
Wouldn’t that be something?
Trump’s feeling optimistic as well, as evidenced by his statement in an interview with Fox Business:
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“[I’m] very happy with where we are now. We’re taking in a fortune, and frankly [it’s] not a very good thing for China, but it is a good thing for us.”
It’s a shocking turnaround to say the least. Especially after trade talks deteriorated in early May, resulting in a series of announced tariff increases from both sides.
“What we’re probably going to hear will be choreographed. They’ll probably say the meeting went well and they’re going back to the negotiating table,” warned Art Hogan, chief market strategist at National Securities.
“This is all fixable […] but the problem is there is too much pageantry around all of this. Both sides need to play to their bases.”
And “play to their bases” they will. With 2020 coming up, Trump looks ready to cool things off, if only to avoid a slowdown ahead of his re-election campaign. Xi is similarly running out of options, as he faces immense pressure from both the Chinese people and Communist Party.
Should a trade war conclusion arrive in the near future, equities would likely soar as the market’s biggest stressor is eliminated in one fell swoop.
However, if Xi and Trump can find enough common ground in Japan to issue a ceasefire, a few unseen complications could also arise.
Namely, the derailing of the Fed’s current interest rate strategy. A trade war truce (even a temporary one) would undoubtedly boost both the market and the U.S. economy, possibly signaling to Fed Chairman Jerome Powell that things aren’t so bad as they once seemed.
If Powell decides to delay (or cancel) an interest rate cut down the road, the short-term effect could be downright catastrophic for bulls. All that goodwill priced into the market over the last few weeks would likely evaporate in an instant, kicking the market into correction territory until the trade war officially ends.
In this case, anything beneficial for the economy could be bad for the market, as it may shift the Fed into a more hawkish stance. It’s a “damned if you do, damned if you don’t” scenario all the way around.
Unless, of course, Trump and Xi can declare peace once and for all. Outside of that, half-measures – like a temporary ceasefire – will only muddle things further.