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Markets Poised For Gains As Fears Of US-China Trade War Diminish

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Markets Poised For Gains As Fears Of US-China Trade War Diminish

U.S. and Chinese officials issued a joint statement over the weekend announcing vague negotiations to stall, if not entirely circumvent, a long-feared trade war.

Treasury Secretary Steven Mnuchin confirmed the Trump administration’s more amenable strategy.

“We're putting the trade war on hold,” Mnuchin said Sunday on Fox News. “ ... We have agreed to put the tariffs on hold while we try to execute the framework."

As part of the agreement, China will “significantly increase purchases of United States goods and services,” particularly in agriculture and energy exports, to diminish the U.S. trade deficit, and both sides are expected to work to expand trade in manufacturing.

The respective governments are also set to improve intellectual property protections.

Why It’s Important

Early fears of a trade war had shaken U.S. markets, and a more conciliatory approach by the Trump administration could yield potentially broad benefits.

“This should be very, very good for U.S. economic growth,” Mnuchin said Monday on CNBC. “You combine this with tax cuts and I think we’re looking at strong GDP growth through the rest of the year.”

Trump added said the food sector in particular stands to profit.

Height Capital Markets doubts any effects will endure, though, particularly given that China has already substantially increased its energy and aerospace imports.

“[The focus] could lead to flashy purchases by the Chinese in the near term, but we see a limited ability to massively increase purchases in either sector,” Height said in a note. 

“This limitation could lead to a crunch near the midterm elections as June and July trade data become available in August and September. With Democrats increasingly focused on criticizing Trump's negotiations with the Chinese, a failure to demonstrate meaningful reductions in the trade deficit could lead Trump to return to a hard line stance as the elections draw closer."

What’s Next

The U.S. will send a delegation to China to settle trade standards for agriculture and energy, and both parties are expected to proactively resolve future trade concerns.

Officials are also working to develop guidelines for long-term business-to-business sales.

“We now have to turn these into binding agreements, and these binding agreements are between companies,” Mnuchin said.

At the time of publication, iShares FTSE/Xinhua China 25 Index (ETF) (NYSE: FXI) and SPDR S&P 500 ETF Trust (NYSE: SPY) were set to open marginally higher off Friday’s close.

Related Links:

China ETFs Dealing With Trade Tensions

What Is A Tariff And What Does It Do? 

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