US China trade deal propels US markets and yields higher and leaves dollar mixed

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The US and China reached a limited trade deal on Friday a first step on the path to what both sides said could be a more comprehensive pact later in the year.

President Trump said the countries reached a “very substantial phase one deal”, and that “Phase two will start almost immediately.”

American equities were higher from the open as progress in the talks were reported throughout the session.  The Dow finished ahead by 319.92 points, 1.21%  at 26,816.59 having been up as much as 500 points earlier in the day.  The S&P 500 gained 32.14 points, 1.09% closing at 2,970.27. 

Treasury yields rose with the return on the 2-Year note adding 4 basis point to 1.597%. The 10-year yield climbed 6 points to 1.734%. The spread between these two benchmark rates widened to 14 points.

Reuters

President Trump said that the Fed should still cuts rates even though the US and China have agreed to this trade deal.

The dollar was mixed as the reduction in trade tension led to a moderate return to risk assets. The yen (USD/JPY) was the big loser with the dollar rising more than a figure on yesterday’s low of 107.02 to 108.47 as traders reversed their Japanese currency safe haven positions.  The euro (EUR/USD) rose about 30 points to 1.1040 dragged higher by the soaring sterling. The yuan (USD/CNY) rose slightly versus the dollar ending at 7.0868 on Friday from the prior day’s close at 7.1153.

The British Pound was the big winner this week soaring 3.6%, from Wednesday’s close at 1.2204 to 1.2640 on Friday on reported progress in the EU-UK exit wrangle.  

The EU has agreed to open technical talks on a Brexit deal said to be reached between UK Prime Minister Boris Jonson and Irish Taoiseach Leo Varadkar.

The trade deal will address certain aspects of the US intellectual property rights issue and end restrictions on some financial services and will reduce proposed American tariffs on Chinese goods.  China will buy $40 to $50 billion worth of American agriculture products, according to President Trump.

Treasury Secretary Steven Mnuchin announced that the White House will delay a new round of duties that were to go into effect on October 15th as the deal is completed over the next three to five weeks. A second round of duties scheduled for December has not yet been eliminated.  

The negotiators did not finish a deal on currency manipulation, but Treasury Secretary Mnuchin said discussions were “almost complete”.

High level talks had resumed this week after preliminary negotiations over the past weeks laid much of the foundations.  The agreement is the first comcrete and  positive development in the 18-month trade war between the world’s two largest economies that has damaged growth and sentiment in both nations.

Several of the more difficult issues from the US side, including charges of forced technology transfers and intellectual property theft and Chinese industrial subsidies have been postponed to the next round of talks.  Mr. Trump said that there had been “good progress” on the technology issues.