US-China prepare to seal 'phase one' deal, now comes the hard part

The positive sentiment fueled by trade hopes is likely to support emerging market stocks

Lukman Otunuga, OpinionIndustry Expert
Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

January 16, 2020

What could go wrong after the United States and China sign the highly anticipated ‘phase one’ deal on Wednesday, January 15?

From the scant details provided, the deal is expected to cut tariffs and boost Chinese purchases of American farm produce, energy and manufactured goods. While this offers some light at the end of the long trade war tunnel, it may be too early for any celebrations. The fact that nothing of the text has been made public, investors could still be left empty-handed subject to the finer details of the deal.

If the ‘phase one’ deal satisfies market speculation and brings both sides closer to mending trade relations, this will be a major relief for financial markets. Expect global stocks to rally, appetite for emerging markets to jump and oil to appreciate as optimism grows over the global economy.

Rebounding oil prices should support GCC producers such as Saudi Arabia, Kuwait and UAE. The positive sentiment fueled by trade hopes is likely to support emerging market stocks - with UAE equities falling into the category. A jump in global risk appetite may support the Dubai Financial Markets, Abu Securities Exchange and Saudi Arabia’s Taduwul.

However, a ‘phase one’ trade deal that underwhelms and leaves investors with more questions than answers may fuel uncertainty. From a general investment perspective, this unfavourable outcome may lead to uncertainty with global stocks, oil prices and emerging markets in the direct firing line. Renewed tensions between the United States and China could result in weak external demand of commodities lower oil prices, ultimately weighing on the region’s economic outlook. As concerns return over slowing global growth, the pessimism could infiltrate UAE’s property market which remains sensitive to changes in economic conditions across the globe, especially in China, India and the United Kingdom.

Even if the United States and China ‘phase one’ deal is signed and manages to appease expectations, the positivity is unlikely to last as investors will turn their focus to ‘phase two’ of the deal. US President Donald Trump is expected to travel to Beijing ’at a later date’ to begin talks on the next phase. Should these negotiations hit roadblocks and tensions resurface, we may find ourselves back at square one with trade talks.

At the end of the day, US-China trade developments are set to remain a major market theme in 2020 until both sides completely roll back all existing tariffs imposed on each other’s goods.

* Any opinions expressed in this article are the author’s own

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