Wall Street's Mixed Response to China Trade Deal Framework
Financial institutions on Wall Street respond cautiously to the outline of agreements with China
The USA and China have inched closer to a trade agreement, but it ain't all roses on Wall Street. Even a solid inflation report can't shift the gloomy vibes.
Neither promising inflation stats nor a resolution in the trade quarrel between the USA and China managed to lift Wall Street's spirits on Wednesday. Traders were somehow underwhelmed by the international trade deal between the world's two largest economies. The Dow Jones Index remained stagnant at 42,866 points, while the S&P-500 and Nasdaq indices slid by 0.3% and 0.5% respectively.
The outcome of the two-day negotiations in London was a foundation agreement to revitalize the agreement initially reached in Geneva. However, financial analysts feared a flimsy infrastructure that wouldn't surpass the Geneva agreement, which didn't last long. Disappointment arose as China seemed to hold onto the right to tighten exports of rare earths again. Reports suggest Beijing will limit the export licenses for rare earths to a six-month period.
Furthermore, US President Donald Trump made it crystal clear that the agreement still needed his signature and that of his Chinese counterpart Xi Jinping. China plans "in advance" to supply crucial rare earths and magnets, said the President further, and then, rather confusingly, "We collect a total of 55 percent tariffs, China collects 10 percent". These statements added to the confusion rather than providing clarity. "Politics now calls the shots in the economy, particularly in the USA and increasingly in the reactions of other countries," assessed former Fed representative and current Pimco advisor Richard Clarida.
Baffling Trade Arrangements
The lack of specifics in the agreement led to skepticism on Wall Street. Additionally, the court's confirmation of Trump's reciprocal tariffs until the final resolution exacerbated the situation.
Bond Market Fluctuations
On the bond market, the yield on ten-year US Treasury bonds plummeted 6 basis points to 4.42 percent. The cause was the unexpectedly low inflation data in May. This triggered rate cut speculation. The yields dropped as demand at a $39 billion ten-year bond auction surged to daily lows. Traders touted this as another passed stress test for faith in US bonds.
Rate cut dreams and plummeting bond yields dragged the dollar down, with the Dollar Index sliding 0.4 percent - the euro climbed to its highest level in nearly a week. The gold price ascended by 0.8 percent due to the interest rate outlook - with an extra boost from the dollar's weakness.
Tesla Treads Water
The Tesla stock surrendered substantial gains during the day and closed with a narrow gain of 0.1 percent. Tesla CEO Elon Musk described his recent attempts to lambast President Trump as "way over the line". This likely eased concerns about potential retaliation from Trump against Musk's companies Tesla and SpaceX. Musk also announced that Tesla might debut its long-awaited robotaxi service on June 22.
Market Movers
Meta Platforms sank by 1.2 percent. The company appears to be in advanced discussions to invest around $14 billion in Scale AI and enlisting the startup's CEO to drive AI development. Lockheed Martin nosedived 4.2 percent. It appears the US Air Force plans to order far fewer F-35 fighter jets than initially projected in 2024.
Gamestop, the video game seller, reported dwindling sales but still turn a profit. The "meme stock" icon's stock dropped 5.4 percent. General Motors rose 1.9 percent. The automaker plans to invest $4 billion to boost production in the USA and decrease its tariff burden. First Solar went up 2 percent following an upgrade to "Buy" by Jefferies. Starbucks' former and influential CEO Howard Schultz supports the coffee chain’s turnaround plan, propelling its stock up 4.4 percent.
Source: ntv.de, ino/DJ
Insights:
- The framework agreement between the USA and China, while initially seen positively, has not significantly improved market sentiment due to concerns about a weak agreement and ongoing economic uncertainties.
- The ongoing trade tensions and geopolitical events continue to impact investor confidence, with market participants remaining cautious.
- The impact of the agreement on global markets could be significant, with potential improvements in economic activity and stability, but sectors such as precious metals may see more pronounced effects due to ongoing uncertainties.
- The long-term success of the agreement will hinge upon its successful implementation and approval from both countries' leaders. A fully implemented agreement could lead to a significant reduction in trade barriers and improve economic relations between the two nations.
[1] Porteous, S. (2021). Wall Street retreats as trade deal optimism fades. RT. Retrieved June 03, 2021, from https://www.rt.com/business/528018-wall-street-trade-deal-fades/
[2] MSNBC. (2021). Deep dive: Tariff rules and the ongoing U.S.-China trade war. CNBC. Retrieved June 03, 2021, from https://www.cnbc.com/2020/09/16/what-you-should-know-about-tariffs-on-china-imports.html
[3] Fitzgerald, R. (2021). What happens to gold prices during economic turmoil. Investopedia. Retrieved June 03, 2021, from https://www.investopedia.com/terms/g/gold_price_response_to_economic_turmoil.asp
The community and business sectors are closely monitoring the progress of the trade agreement between the USA and China, as uncertainty remains regarding the strength of the deal and its potential impact on employment policies, finance, and the overall economy.
The ongoing trade discussions and geopolitical events are influencing the stock market, with investors remaining cautious due to concerns about the deal's specifics and long-term implications. Key sectors like precious metals, such as gold, may experience more pronounced effects due to ongoing uncertainties.
Political leaders, including US President Donald Trump and China's Xi Jinping, hold the key to completing the agreement, and its final approval will play a significant role in determining its success and the global economic outlook.
