Why the Stakes in This Weeks USChina Trade Talks Couldnt Be Higher for Markets

With little on the calendar over the next couple of day’s (tomorrow’s RBNZ meeting notwithstanding), the ongoing US-China trade negotiations will take center stage for traders.

To recap: The US has levied 25% tariffs on $50B of Chinese technology imports, along with 10% tariffs on $200B of other goods for the last ten months. In a tweet over the weekend, President Trump vowed to increase the 10% tariffs to 25% at 12:01 ET on Friday if a deal is not reached; he also indicated that he was considering implementing 25% import taxes on the rest of the $325B in Chinese imports that are not presently penalized. To put it simply, Trump’s threat has dramatically raised the stakes for this week’s US-China negotiations in Washington DC.

After initially hesitating, China is still sending a trade delegation, including chief trade negotiator Liu He, to the US this week. For traders, Thursday and Friday’s high-level talks between Liu, U.S. Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin will be the key event to watch this month. From the market’s perspective, a “successful” negotiation will result in a scheduled Trump-Xi summit to sign a trade deal. Anything less, especially if it involves an escalation of tariffs on both sides, would be seen as a negative outcome for global risk appetite.

Market Implications

At the risk of stating the obvious, the trading relationship between the planet’s two largest economies has a dramatic impact on every single market across the globe. Speaking broadly, an escalation in tariffs would hurt risk-sensitive assets like high-yielding currencies, economically-sensitive commodities, and global stock indices (though S&P 500 traders are nonplussed so far) at the expense of “safe havens” (lower-yielding currencies, gold, and global bonds).

Source: TradingView, FOREX.com

It’s rare to get a “dress rehearsal” in trading, but the moves we saw at the start of the week give us a preview of what to expect if this week’s talks between the US and China break down. More concretely, another escalation in tariffs could take USD/JPY back to 109.00, AUD/USD below 0.6900 (if not 0.6800), and Gold up toward $1300, in addition to lopping another 10%+ off Chinese stocks and potentially ending this year’s uptrend in US indices.

The market stakes of this week’s negotiations couldn’t be higher – will US and Chinese negotiators be up to the task?