For months, the world’s top economies have been playing a dangerous game of high-stakes brinkmanship that threatened to topple the world order. They have finally agreed to peacefully coexist—for now. Calm has returned to the markets after Presidents Donald Trump and Xi Jinping met on Saturday at the G20 summit and agreed to hit the reset button in trade talks, at least delaying an escalation in the months’-long wrangle.
"We had a very good meeting with President Xi of China," Trump told reporters on Saturday without divulging further details.
Meanwhile, China's state-run Xinhua News Agency reported that the US would not move ahead with $300 billion in proposed additional duties that would have hit a wide range of consumer goods ranging from smartphones to clothing.
Trump also offered concessions on Huawei, saying he would now allow American companies to sell some components to the telecom giant. However, he also added that the company will remain on the blacklist with its fate hanging in the air until the end of the trade negotiations.
Despite the positive vibes, one thing was conspicuous by its absence: zero clarity was offered on the modus operandi of how the two nations will resolve contentious issues including curbing China’s aggressive push to challenge American technological dominance.
Nevertheless, the markets took the new development in their stride, with some big winners and losers.
How the markets reacted: the winners
Stocks markets have been among the biggest winners of the trade truce.
The Dow Jones Industrial Average has jumped 250 points on Monday at the opening bell to near all-time highs at 26,848.27.
The market benchmark, the S&P 500, snapped a four-day losing streak on Friday as investors remained optimistic about the upcoming talks in Osaka, Japan. The index has rallied another 0.98 percent to 2,970.60 points on the week’ first session.
The market though has the finance sector largely to thank for the turnaround, with banking stocks posting strong gains after being given a clean bill of health. The sector’s benchmark, the SPDR Bank ETF (KBE) climbed 1.50 percent on Friday after all but one of 18 major banks passed the Fed’s stress test.
The regulator said the tests proved that the U.S. banking sector remains significantly stronger than before the crisis and approved capital return plans, leading to a flurry of dividend hikes and new share repurchase programs.
Related: What Would You Do If You Found A Wallet On The Street? KBE shows no signs of slowing down with the index up another 1.3 percent in early Monday trading.
Meanwhile, oil prices have jumped nearly two percent on Monday after OPEC and Russia reached an agreement to extend output cuts for the rest of the year.
As expected, easing geopolitical concerns took a severe toll on safe haven assets like gold and silver, effectively slamming the brakes on the flight-to-safety trade that had powered one of the biggest rallies in recent years.
Gold suffered it’s biggest one-day fall in the year-to-date, with prices cratering 1.8 percent to $1,384.06 an ounce. That marked a sharp reversal in fortunes for the yellow metal after an impressive eight percent rally last month took prices to a six-year high of $1,439.21 on June 25
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About a week ago, we had warned that gold prices were likely to correct if Trump and Xi managed to strike some sort of deal. However, we also expressed optimism that the mid-and-long-term outlook remains favorable with the unresolved geopolitical issues continuing to be a major overhang.
It’s worth noting that even though the Trump-Xi meeting was more conciliatory than expected, in the final analysis, the new deal only end up being a temporary stay of execution because the underlying issues between the two nations seem insurmountable.
As Neil Shearing, London-based chief economist at Capital Economics, has warned: "… I don't think this marks the turning of the tide. Talks will ebb and flow, but the direction over the next 12 months will be toward renewed escalation because issues around industrial strategy will prove to be so intractable."
Interestingly, Trump’s decision to go easy on Huawei drew immediate political fire, with Senate Minority Leader Chuck Schumer, D-N.Y saying that the concession was a bad move since Huawei was one of the most potent levers that America can deploy to force Beijing to play fair on trade.
The trade truce aside, the Iran situation remains a ticking time-bomb with the U.S. on Saturday deploying F-22 stealth fighters to Qatar. The U.S. and Qatar signed a military cooperation agreement in the aftermath of the 1991 Gulf War, and the latest move to Qatar’s air-base is meant to not only serve as a deterrent against military action by Iran but also provides a first line of attack if push comes to shove.
Another big loser has been bitcoin, which has slowly been making its case as digital gold. The cryptocurrency has retreated sharply from its June 26 17-month high of $13,731.98 to trade at $10,539.54 on Monday 14.20 UTC.
By Alex Kimani for conil.me
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