US-China trade talk going “really well”. Is this what the markets are awaiting for to go back higher?

US-China trade talk going “really well”. Is this what the markets are awaiting for to go back higher?

Posted on Tuesday, January 8 2019 at 6:14 pm UTC

China and the United States are holding vice-ministerial level trade talks, which means that the outcome of the negotiations will most probably be positive. Usually such talks are preceded by numerous meetings and secret consultations aiming to review the demands of the parties and seal a kind of preliminary agreement on basic issues, and then come the vice-ministerial level talks to finalize the agreement.

The talks are unlikely to result in a radical solution to trade disputes. It is clear that the United States and China have entered into a long-term technology war, but positive steps towards ending the bruising confrontation between the world’s two largest economies, and setting rules to regulate relations will have a positive impact on the markets and improve investors’ risk appetite.

We should not forget that the trade war fears were the main cause behind the stock market slump, as well as the hasty rise in interest rates, which in turn led to higher bond yields, which for the first time in many years took the wind out of the sails of equity investors. And thus easing trade storm will have a positive impact on markets on the one hand. On the other hand, the recent message by Jerome Powell that the Fed’s that monetary policy is flexible and will be set in line with economic changes, indicates that the Fed may not stay on the scheduled course for hiking rates this year, and this if happened will in turn help stock market to recover.

But overall, I do not expect markets to climb back at to the same pace we witnessed in past years. The markets have been supported by the tax relief and Trump incentive schemes and now need new motives and I do not see any motive. There are new challenges facing companies as the cost of debt rose with the rising interest rates and growth rates stabilized, and therefore there are clear variables Credit Spread and variables in the yield curve indicating that the risk will most probably remain tilted to the downside this year.