US-China Trade Deal, A Short-Term Truce

The two nations have agreed on a narrow set of issues. This is unlikely to lead to a favourable medium-term outcome

- Mohamed A El-Erian

There are times, including in armed conflict, when adversaries see it in their own interests to opt for a truce and sell it to the outside world as a steppingstone to a comprehensive peace. But both sides know it will be only a prelude to renewed tensions down the road. This could well be the best way to think of the phase one deal between China and the US. Yet, it’s not how the equity markets see the situation. Instead, they are pricing the deal as simultaneously improving both the immediate and longer-term economic outlook.

After a protracted negotiation process, the American and Chinese governments finally reached an agreement on a rather narrow set of issues. Pending additional information, stock markets have interpreted this as constituting a meaningful and immediate de-escalation of trade tensions, driving several indexes to record levels.

The most cited benefit is removing the short-term risk of tariff increases, a development welcomed by much of the US manufacturing sector. This has led some observers and market strategists to anticipate a halt to the contraction in global manufacturing, leading to higher business investment, the notably lagging components of global GDP growth.

Lacks conviction