13-10: Partial deal, why?

Markets have been very optimistic in the last days. The S&P went up over 1% on Thursday and also on Friday. Trump was giving the market hopes on a partial deal with China. Next to that there has been a bit of optimism on the Brexit saga.

Trump and China finally agree on something

As during every negotioation so far, Trump often tweeted that trade talks are going well and that he has warm feelings about China. Quite often a day later he would wake up angry and come with new sanctions or show his annoyance with China.

But this time the market got more optimistic in the last days and finally Trump and China made a partial deal, called Phase 1 deal. Main outcome was that the October tariff hike will not happen, that China will buy more US agricultural goods and that China opens their market for US financial institutions. There has not been a decision made yet about the new tarifss that kick in in December. The current deal might mean a longer de-escalation of the trade conflict.

Why does Trump make a deal now?

In the end it all comes down to game theory. It is not just about the details of the deal. It is more about the fact that Trump wanted people to see that he fights for the US economy and that he wants the Americans to think that he gets a great deal with China. If he would sign a deal on day 1, even if it would be a good deal, it would look as a quick deal that would not be in the benefits of the US. So he had to wait a bit, put some tariffs on China and let people think China is becoming his child and needs to sign a deal to make sure the Chinese economy holds up. Trump is very good at these kind of games and it is wise he signed a partial deal.

Why not a complete deal?

A complete deal could be a sign of weakness from Trump. First Trump and China were complete enemies and now they would make a complete deal? That would sound strange. Currently Trump can say that the Chinese gave in a bit and a partial deal was possible. To get to a full deal the Chinese have to do more concessions. Trump keeps the possibilities for further measures open. Next to that, Trump wants the Fed to lower interest rates in order to boost the economy. If Trump would sign a complete deal now, quite a bit of geopolitical worries would be gone. The Fed might decide to not further lower the interest rates.

Financial markets are quite relieved and no further escalations and a Brexit solution can bring a heavy end of year rally in stocks. Stocks have been suffering for nearly two years and there can be some optimism now for the next months.

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