Trade War Update: Phase-one deal expectations are sky high; Stocks, Yuan and Treasury yields rally

The Santa rally is coming early as President Trump signaled US negotiators are getting very close to a big deal with China.  Trump’s tweet was more optimistic than usual as he indicated that that the Chinese are not alone in wanting a deal.  Almost a half hour later the Wall Street Journal reported that US is also offering slash exiting tariffs by as much as half on roughly $360 billion of Chinese goods and will cancel the new round of levies that were set to be triggered at the end of the week.  Risk appetite is back as expectations are sky high for the phase-one trade deal to get done this side of Christmas.  Following the positive trade headlines, US stocks soared, the Chinese yuan rallied through the 7 handle and Treasury yields skyrocketed.  The dollar fell against the Chinese yuan, Japanese yen, Australian dollar and kiwi, but strengthened to the euro and loonie. 

China’s Global Times brought back some of that optimism after tweeting, “China wants to see real actions not just words to show sincerity such as rolling back tariffs.”  Now that we are finally seeing some actual numbers on concession by the US negotiators, financial markets are about 80% confident we will now see that phase-one trade deal done over the next two weeks. 

Oil

Oil prices jumped higher as optimism is sky high for a phase-one trade deal to be reached before the holidays.  The world’s two largest economy are inching closer to a trade deal and that should be very positive for the demand outlook for crude.  The problem for oil bulls is that they will need to see a broader US-China trade deal that would give businesses confidence in delivering business investment. 

For West Texas Intermediate crude to break above and stay above the $60 level, the global growth rebound needs to be firmly in place. 

Gold

Gold’s recent rally hit a brick wall as Trump seems to be entering holiday mode after signaling a trade deal with China is nearing.  Gold just needs to weather the storm that is trade optimism. Gold will still see strong demand from investors as central banks keep diversifying away from the dollar, major central banks are nowhere near tightening and geopolitical risks are plentiful.  Gold could still see some bearish momentum target the $1,450 low, but the longer-term bullish outlook remains intact. 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst - The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geopolitical events and monetary policies around the world. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC and Bloomberg, and is often quoted in leading publications including the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University.
Ed Moya