The fresh outbreak of tariff increases between the two main global economies had sent equities plunging. And the market was hoping that the leaders would come to an agreement as they had done at the end of 2018 in Argentina.
Trump Agrees to Refrain From Further Tariffs
Fortunately, these hopes were not in vain. Trump and Xi were able to quell rising investor uncertainty with a new pact.
Following the meeting between the two leaders, Trump told reporters:
“We’re right back on track. We’ll see what happens.”
Trump added that the pair had agreed to re-commit to trade negotiations. The President also removed the cloud that has been hanging over the markets recently by confirming that he would not be tariffing the remaining $300 billion of Chinese goods entering the US each year. He stated:
“I promised that, for at least the time, being we’re not going to be lifting tariffs on China. We won’t be adding an additional tremendous amount – we have $350 billion left that could be tariffed, taxed – we’re not going to be doing that.”
Trump Unexpectedly Backpedals on Huawei
While many were hoping for some compromise over tariffs, the market was surprised by Trump’s change of heart over Huawei. Back in May, Trump had added Huawei to the “Entity List,” a list of companies which US firms are prohibited from dealing with without government approval.
The move was a major blow to the Chinese firm and markets reacted fearfully with heavy selling in equities. However, at the meeting with Xi, Trump declared that “US companies can sell their equipment to Huawei.”
In return, China agreed to purchase a “tremendous amount” of US food and agricultural products.
Trump Makes History & Meets Kim In North Korea
In a further surprise twist, after the summit, Trump broke historic ground by becoming the first US president to set foot on North Korean soil. Following a spontaneous tweet where Trump suggested the possibility of the two leaders meeting, Kim extended the invitation to Trump.
The two leaders met at the demilitarized zone. Kim then escorted Trump for a short distance onto the North Korean side. The display has buoyed the markets and is an encouraging sign for Trump trying to achieve de-nuclearization of North Korea.
Equities are firming in response to news that the two leaders might meet again soon.
Market Soars on Trade War Optimism
The market reaction to these developments has been one of strong optimism. Risk assets are surging higher while safe-haven assets such as gold and JPY have fallen. The SPX500 hit fresh record highs shortly after the open, trading above the prior 2940 level to hit highs of 2976, which are currently broken.
XAUUSD, meanwhile, has continued its sharp reversal lower from the 1433 level to trade 1388 last as safe haven flows dry up. However, the key to the follow through on these moves will be whether Trump and Xi are able to keep optimism alive.
Consequently, the market will now be paying close attention to the first set of trade talks following the meeting. Given that the negotiations after the November 2018 G20 meetings failed, the markets are wondering how long this optimism will last. Investors everywhere are hoping that this time around, the superpowers finally reach a deal. And that seems to be supporting prices, at least for now.