Markets Embrace U.S./China Trade Truce – But Troubling Signs Remain

trade truce

Markets are moving upward today based on rosy indicators about U.S. and China and a trade truce that, at least for today, seems to be moving in a positive direction.

The S&P 500 is up 1.3%, and the NASDAQ is up 2%, as president talks about what it takes to jump-start the truce with China after threats of a trade war scared farmers and everybody else.

One major piece of news is Huawei’s Meng Wanzhou has been  granted bail in Canada according to the New York Times. Wanzhou was apprehended by officials recently on charges that she contributed to defrauding American financial institutions. At issue is Huawei’s past stake in a company called SkyCom, which has done business with Iran during a period where the U.S. seeks to impose sanctions.

“The United States has 60 days from Ms. Meng’s arrest on Dec. 1 to file a formal extradition request with Canadian authorities,” wrote NYT reporter Kate Conger yesterday. “Canada grants around 90 percent of extradition requests that are heard in court, owing to 1999 changes to its extradition laws. If an extradition request is granted, Ms. Meng will have several options to appeal, and the process could take many months.”

We assume resolution of Wanzhou’s case will allow the U.S. and China to ease tensions. Meanwhile, the Financial Times is reporting today that semiconductor markets are taking advantage of the news of market rebounds, while benchmark indices are recovering from prior losses.

Writer Dave Shellock also cites Andrew Hunter at Capital Economics talking about how the present stability of core inflation is also a good indicator.

While this is good news for today, economists and others are still concerned about serious challenges to any long-lasting U.S./China truce.

There’s the back-and-forth over soybean prices, and policy details on importing and exporting of commodities to hash out – but there’s also a political element to this as well.

CNBC reports last week talked about the elephant in the room – China’s “One China” policy and how Taiwan could be a factor in trade talks.

In fact, looking at comparative statements from U.S. and China delegations, you can see that China expects the One China policy to be followed as part of an ongoing truce deal.

“The trade turmoil has already spilled into military relations as the two superpowers scale down high-level security engagements,” wrote Nyshka Chandran Dec. 5, describing how multiple issues interplay in talks between the two superpowers. “The bilateral defense alliance could now remain at a deadlock until progress is made on the trade front.”

Whether the U.S. is poised to accept China’s ownership of Taiwan and give in on issues like the South China Sea remains to be seen. For right now, the market rebound is based on the premise that both the Chinese and the Americans will stay at the table.