Trade Remains A Wild Card

The November mainstream news cycle was dominated by presidential impeachment proceedings in Washington, but financial markets were largely dismissive of any risks related to the matter. The S&P 500 closed the month up more than 3% and Treasury yields were higher across the curve. U.S./China trade negotiations remain the greatest wild card for risk assets. While a phase one agreement between the two countries was not executed in November, the baseline expectation is that a deal will be reached soon. However, as we’ve learned on multiple occasions in 2019, particularly May and August, there’s certainly a mercurial element to these negotiations. A tweet from the president has led to multiple market corrections, and with much optimism again priced into financial markets, a postponement in a phase one trade deal until 2020 would likely spark another correction before year end.

November At-A-Glance

• The presidential impeachment inquiry has not yet had a notable impact on financial markets.
• Broad market performance in November suggested increased optimism that a U.S./China trade deal would get done before year-end.
• Recent comments from Fed leaders reiterated a more neutral bias regarding interest rate policy.

One development that may complicate trade negotiations is the recent U.S. legislation backing protesters in Hong Kong. On November 27, President Trump signed the Hong Kong Human Rights and Democracy Act of 2019 into law, an overwhelmingly bipartisan bill passed by Congress to combat China’s influence in Hong Kong’s affairs. The law effectively requires the State Department to conduct an annual review to ensure that Hong Kong’s one country, two systems agreement with China is upheld for Hong Kong to be afforded its special trade status with the United States. China was very critical of the bill throughout the legislative process, and once it became law, China’s foreign ministry condemned it and vowed to protect the country’s national security. According to Axios, a source close to the White House negotiating team said the president’s decision to sign the Hong Kong bill may delay any phase one trade agreement until the year-end at the earliest.

President Trump is expected to delay tariffs scheduled to begin December 15 as a gesture of good will, but recent reports suggest that China has been adamant that existing tariffs be lifted as a condition for any phase one deal. On November 29, Reuters reported that U.S. officials are considering new regulations that would further restrict American suppliers to Huawei, a measure that would almost certainly draw the ire of Chinese officials. Financial market liquidity is typically weakest in the last few weeks of the year, so, depending on the timing, any major headlines (positive or negative) could spark an exacerbated reaction in certain markets.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.