US markets have continued to drop after another strong rally on Wednesday, responding in large part to news that China had agreed to a 90-day truce in the trade war. And according to my colleagues Christopher Burns and Phil Wegmann, global markets are also falling along with the stock markets:
It’s a tumble, sure, but why the weakness?
Markets are back to December levels, and the major indexes are off nearly 1.5 percent
And there are signs that perhaps more rational people, a lot more rational people, are now taking sides:
This morning’s reports of a possible trade agreement seem to confirm that “trade war” talks now focus not on exactly zero tariffs but rather a ‘lower-ball’ number.
American investors have hardly been among the great beneficiaries of trade tensions — after all, many of the costs of tariffs (mostly from retaliatory levies) has been borne by US consumers
Still, both Trump and China’s leaders have reason to preserve the modest confidence that this truce might buy them, and probably that whatever even that lower-ball figure is, it will be higher than both sides were actually willing to agree. What’s more, the markets have looked at the meeting and seen – at least temporarily – a big drop in the level of fear; which suggests that a drop in global markets is a little bit premature.
That said, Trump’s expressed desire to change the terms of the truce once it ends, at least to the extent that the scheduled increase in tariffs on $200 billion worth of Chinese goods turns out to be long enough, and holds, to make any real difference, will make it harder to maintain the optimism generated by the ceasefire. So, indeed, China is facing new costs on its end too, and the markets will suffer as a result.
It all adds up to at least a partial setback for the current slump, as well as a bit of the usual hopefulness that generally follows a sharp pullback. But a freeze on tariffs is likely to be an only partial victory, and probably not even that. As every informed observer expects Trump and Xi to simply make further concessions, a serious, long-lasting pause in the trade war is still on the way.
Of course, Trump could very much hold out for a deal — or wait until the end of the negotiating session to announce that he’s hitched up the entire car — but that seems to be impossible without committing to an agreed increase in tariffs, again. And there’s a pretty clear reason for that: It would look to be an abandonment of his promised “America First” policies, and the strong reaction would help all the other countries that have been victimized by the tit-for-tat tariffs.
Whatever the cause of this market weakness, it’s likely to be short-lived and temporary. To be sure, some stocks will still slide over the next couple of weeks, as their valuations gradually factor in the removal of some of the risk that has priced into them. But over the long term, most will recover.