We are approaching all time highs again, on a “tentative” trade deal narrative. The Trump Administration and Chinese officials agreed to a “Phase 1” trade deal, which is verbal in nature. China has already made it known they won’t budge on intellectual property enforcement and will stoke Trump’s ego by purchasing an insignificant $50 billion in farm goods from the US. China also signaled they want all future tariff hikes cancelled until another round of talks will reach something definitive. This “verbal” agreement secured nothing for Trump and was widely viewed as a move to appease financial markets. Traders were looking for both countries to make actual progress in trade negotiation; however, were willing to settle for no additional escalation.
Trump is pinning his election chances on the US economy heading full steam into November 2020 and may be forced to compromise with China to achieve this goal. With GDP ticking below 2% into Q4 and stagnant inflation, the US really needs Trump to strike a deal to keep the US economy from slipping into recession. You wouldn’t notice faltering trade talks in the broad US markets, as the S&P nears a critical resistance level of 3000 points and continues to bounce in a 3% to 5% range.
World economic indicators continue to signal recessionary pressures; however, the US economy remains a safe haven and attractive for fixed income investors. As long as treasuries are yielding above 0%, institutional fixed income investors will have to buy US debt. This flood of foreign money into the US debt and equity markets has kept our markets afloat and returning positive. Even when domestic demand dries up, foreign investors are faced with no alternatives and must buy US securities, they keyword being “must”. This foreign flood of money explains why US markets continue to outperform most world indices and the reason the US is the best game in town.