Last Thursday, Donald Trump took to Twitter to tell the world that trade talks with Chinese President Xi Jinping were “moving along nicely”.
His words prompted a rise in Asian stock markets; the Shanghai Composite index climbed by almost 2.7 per cent during trading on Friday, and the Hang Seng surged by about 4.2 per cent, as market players took the President’s words as a sign that the bitter trade war was coming to a close.
But the market momentum was short-lived.
Hussein Sayed, chief market strategist at FXTM, points out that stocks in Hong Kong, Shanghai, Tokyo, South Korea, and Australia were all in the red on Monday, after White House economic adviser Larry Kudlow said that President Trump had not asked his cabinet to draw up a trade deal with China.
There’s certainly confusion: while Kudlow told CNBC that the US is “not on the cusp of a deal” with China, on the same day, anonymous sources told Bloomberg that a potential trade agreement is being drafted.
“Such conflicting reports make investors more nervous, especially seeing that bears seem to have taken control over the past few weeks,” says FXTM’s Sayed.
The disparity has quickly turned the market rally into a lag.
Konstantinos Anthis, head of research at ADSS, says equities in Asia are trading with a “bearish bias”. “Confusion over whether a truce between the two sides is possible is keeping investors on the defensive, while the risk of a divided Congress, in light of the midterm elections, is also weighing down on risk sentiment.”
He points out that US futures are trending on the downside, suggesting a bearish opening bell at the start of the week.
Some market players clearly jumped the gun on Friday. And, as always, it seems that we should take much of what Trump says with a pinch of salt.
Bear in mind that, just last month, Trump himself said that a deal was not on the cards in the near future.
War and peace
The consensus among most analysts is that the President’s recent claims amount to little more than window dressing – an effort to sideline the trade dispute, and soothe the stock market in the lead up to the midterms.
“For the moment, the US-China trade dispute is taking a backseat as President Trump plunged himself into last-minute campaigning before the US midterm elections,” says Fiona Cincotta, senior market analyst at City Index.
But those aren’t the only reasons that the markets started dipping again.
Yesterday, during an international trade fair in Shanghai, President Xi made it clear that China would not give in to pressure from the US to change its trade policies.
In what appeared to be a jibe at Trump, Xi lambasted protectionism and promised to make it easier for foreign companies to tap the Chinese economy.
As far as the US-China trade war is concerned, Xi’s strong words add fuel to the fire, increasing scepticism that a deal will be made anytime soon.
While Xi also made various pledges to increase imports by cutting tariffs, the lack of detail or a specific timeframe has left many doubting whether such reforms will come to fruition. It was also unclear which countries would benefit from the lower tariffs Xi proposed.
Critics have pointed out that the implementation of Chinese reforms have been too slow, and while Xi wants to portray China as the champion of globalisation, the country is still regarded as one of the most protectionist in the world.
Later this month, Xi and Trump will be meeting at the G20 summit to discuss the ongoing trade issues, but there remain doubts about whether a deal will come to light, with some analysts citing problems around the complexity of sticking points like intellectual property.
It’s also not clear whether Trump is likely to ease up on his tough sanctions against China.
Over the past year, the US has made it more expensive for American consumers to buy Chinese goods, imposing tariffs on $250bn of Chinese exports. In retaliation, China has slapped the US with tariffs on $110bn of US goods.
For the sake of economic growth, the markets will be praying for an end to this tit-for-tat game plan.
And yet, while both the US and Chinese presidents have made some big promises, the two leaders are often criticised for being prone to a similar flaw: that their words don’t always turn into action.
The battle is likely to rage on, and Asian markets don’t look like they’ll be emerging from their dark times just yet. Last week might have looked like a light at the end of the tunnel, but it was really just a flicker of hope.