Hong Kong stocks rallied late in the session on 7 November and S&P futures rose 0.5% ahead of the US open after China’s Commerce Ministry said that the US and China have agreed to cancel existing tariffs in different phases. A ministry spokesman said that the US and China must simultaneously cancel some tariffs for both sides to reach a Phase 1 deal.
A number of points remain to be clarified.
- Which tariffs would be canceled, when, and subject to what conditions still need to be negotiated. As of time of writing, US officials have yet to confirm the Chinese Commerce Ministry remarks. And comments from Washington just yesterday sounded less than optimistic, with an anticipated signing ceremony by Presidents Trump and Xi possibly pushed back to December.
- Phased cancelation of tariffs suggests an enforcement mechanism, which has previously proved difficult to negotiate, may need to be part of the Phase 1 deal.
- And it remains unclear whether the terms of any Phase 1 deal would be sufficiently trusted to drive a rebound in corporate investment and bring growth back to trend.But if progress continues in the current direction, and it appears more likely that a deal involving a rollback of tariffs and an enforcement mechanism can be reached, that would be a positive surprise beyond our current expectations and could lead to further upside for equities.
For now, we continue to focus on earning yield rather than looking for much higher equity prices. In emerging markets we prefer USD-denominated sovereign bonds, and in our FX strategy we overweight select high-yielding emerging market currencies versus a set of lower-yielding currencies. We prefer US and Japanese equities relative to Eurozone stocks, which reflects our view on the relative earnings outlook.
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