Trade War Truce: Markets Jump as Trump Says China Will Halt New Car Tariffs

Global stock markets rallied on Monday after the US and China agreed a 90-day truce in their trade war at a weekend meeting of the G20 nations in Argentina.

The outcome of the two-and-a-half-hour dinner meeting between Donald Trump and Xi Jinping in Buenos Aires, following months of escalating tensions on trade and other issues, boosted financial markets around the world.

The FTSE 100 index in London rose more than 2%, while Germany’s Dax jumped 2.6%, France’s CAC gained 2%, Spain’s Ibex rose 1.8% and Italy’s FTSE MiB gained 1.9%.

In Asia, the benchmark Shanghai Composite index led the way with a rise of 2.57%, while Hong Kong was up 2.55% and Tokyo closed 1% better off. Australia’s benchmark ASX200 index finished the day 1.8% higher.

Markets were cheered by news that Washington had deferred its plan to raise the tariff on $200bn (£156bn) of Chinese imports from 10% to 25%, for 90 days, to allow more time for negotiations. The tariffs were scheduled to take effect on 1 January.

In return, China agreed to purchase a “very substantial” amount of US goods including farm, energy and industrial products. This would help narrow the large trade gap between the two countries. Trump declared that China would also “reduce and remove” tariffs below the 40% level that Beijing is currently charging on US cars.

China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.— Donald J. Trump (@realDonaldTrump) December 3, 2018

The two sides also agreed to begin discussions on how to resolve other issues of concern, including intellectual property protection, non-tariff trade barriers and cyber theft.

Neil Wilson, the chief market analyst at Markets.com, said this could spark a pre-Christmas rally through December. “Some may be concerned that there was no official word from China in relation to auto tariffs, and that the two sides are saying different things about the meeting,” he said.

“Nevertheless, when both sides can claim they won, it’s usually good for sentiment. This is all shaping up to be positive for equities and other risk assets … This positive rhetoric and mood music is likely to be sustained through December as the two sides seek a deal, which is likely to mean we see a decent Santa rally through December.”

The White House warned the existing 10% tariffs on $200bn of Chinese goods would be lifted to 25% if no deal was reached within 90 days, once again setting the clock ticking for a potential standoff at the end of March 2019.

Analysts cautioned that the trade deal may have only bought some time for more wrangling over the deeply divisive trade and policy differences, and said China’s economy would continue to cool due to weakening domestic demand.

“This is a relief rally,” said Paul Kitney, the chief equity strategist at Daiwa Capital Markets in Hong Kong. The agreement “is not a ceasefire, it’s just a de-escalation,” he said. “The existing tariffs are still having a negative impact on the Chinese economy, they haven’t gone away.”

His comments were borne out by figures released on Monday showing that China’s factory activity grew slightly in November, though new export orders extended their decline in a further blow to the sector already hurt by trade frictions.

Chinese state media cautiously welcomed the trade war truce. But in an editorial, the official China Daily warned that while the new “consensus” was a welcome development and gave both sides “breathing space” to resolve their differences, there was no “magic wand” that would allow the grievances to disappear immediately.

“Given the complexity of interactions between the two economies, the rest of the world will still be holding its collective breath,” it said.

The Global Times, a widely read Chinese tabloid, published by the ruling Communist party’s official People’s Daily, warned people had to have realistic expectations.

“The Chinese public needs to keep in mind that China-US trade negotiations fluctuate. China’s reform and opening-up’s broad perspective recognises that the rest of the world does things differently,” it said in its editorial.