Following the unexpected decision of U.S. President Donald Trump to consider establishing a partial trade deal with China ahead of the new round of trade deal talks, the Dow Jones increased by around 500 points within three days.
Since September 10, the Dow Jones Industrial Average (DJIA) has climbed from 26,721 points to 27,219 points – a nearly 2% gain – as the sentiment around U.S. equities generally improved.
Trade deal with China remains the biggest driving factor for Dow Jones
When President Trump released a tweetstorm about the lack of progress on the talks surrounding the trade deal and labeled President Xi and Federal Reserve chairman Jerome Powell as an “enemy,” most investors expressed growing concerns towards the short term trend of the Dow Jones.
….My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?
— Donald J. Trump (@realDonaldTrump) August 23, 2019
At the time, high profile strategists at firms like Janus Henderson said that the yield of the 10-year Treasury could potentially drop to sub-zero, creating instability in the market.
The gloomy outlook on the Dow was partly triggered by a struggling manufacturing sector that was being undermined by the ongoing U.S.-China trade war.
MUFG Union Bank’s Chris Rupkey said earlier this month that manufacturing already entered into recession and that confidence within the sector was in decline.
U.S. economy is growing, labor market is strong
However, other sectors weren’t performing particularly poorly and Bill O’Donnell, a rates strategist at Citigroup, said that the strength of the labor market indicates that the U.S. economy is still relatively strong.
“One thing that is very clear to me in the midst of all of this cacophony of headlines is that there is absolutely no indication that rates are set to rise from here. Right now stocks are still not far from their record highs, the labour market looks to be in really solid condition and the US economy is still doing fine,” O’Donnell stated in early September.
The August jobs report fell slightly below expectations but the U.S. economy still recorded a gain of over 130,000 jobs, adding to the overall decrease in unemployment in the U.S. since early 2019.
With journalists in China such as Hu Xijin, the editor of the Chinese and English editions of the Global Times, hinting that the trade dispute is close to being resolved, at least towards a partial deal, the sentiment around the Dow Jones is expected to improve further in the weeks to come.
“Based on what I know, Chinese govt encourages Chinese companies to buy certain amount of US farm products, including soybeans and pork, which will also be exempted from additional tariffs. It is hoped the US side can keep goodwill reciprocity with China through practical actions,” said Xijin.
Some strategists also expect the introduction of new stimuli by the European Central Bank (ECB) to apply more pressure on major central banks to adopt similar measures to shore up their economy.
ECB introducing stimuli that are not “proportionate” to current economic conditions
Mario Draghi, the president of the ECB, was criticized for releasing stimulus efforts that are not “proportionate” to the decline in the growth of the global economy and that of the Eurozone.
“This broad package of measures, in particular restarting the [asset purchase program], is disproportionate to the present economic conditions,” Klaas Knot, the head of the Dutch central bank, said.
The ECB’s stimulus measures are now expected to apply pressure on other central banks that are also considering looser monetary policy. The growing synergy between central-bank policy and improving trade-deal progress could be a major tailwind for the Dow.