US equities unmoved by US-China trade deal

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The long-awaited “phase one” trade deal hasfinally been signed. After two turbulent years of trade disputes that have weighed on the global economy, investors got some relief on Wednesday with the US and China agreeing apause in the trade war.

The main ingredient of the deal is a commitment by China to purchase an additional $200 billion worth of US products over the next two years. Out of the total additional purchases, 39% will be inmanufactured goods, 27% in the energy sector and 19% inservices. In return, the US will cancel planned tariffs on some consumer products and halfthe tariff rate from 15% to 7.5% on other goods. However, the 25% tariffs on $250 billion worth of Chinese industrial products will remain in place, as will China’s retaliatory tariffs of $100 billion on US goods. 

An enforcement mechanism has also been outlined in the 86-page agreement, but the next steps havebeen kept vague with no indications as to when we will see a “phase two” agreement.

Market reaction has been relatively subduedto the deal signing. Almost all details were already known to investors and priced into markets. Now investors will need to waitandsee if the trade situation improves or levies will be re-imposed, but in the short term, attention will move to corporate earnings and economic data.

So far, more than 80% of US companies who have already reported have managed to beat the bottom line and if this trend continues we may see a positive quarter on a year-on-year basis as opposed to expectations of a 2% decline. This doesn’t necessarily mean stocks will go higher from current levels. The SP 500 forward P/E ratio is currently standing at 18.4, and without further monetary or fiscal policy easing, it’s going to be difficult to justify a further rally in prices.