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Dow Futures Erupts on China-US Trade Tariff Rollback, but There’s a Big If

Last Updated September 23, 2020 1:15 PM
Harsh Chauhan
Last Updated September 23, 2020 1:15 PM

Futures on the Dow Jones Industrial Average (DJIA) are flying high Thursday thanks to the favorable trade war-related developments between the U.S. and China. Beijing and Washington have reportedly agreed to remove the trade tariffs in a phased manner. This follows two weeks of negotiations between the two nations, which has brought them closer to a “phase one” trade agreement.

It is not surprising to see the market celebrate this development. The U.S.-China trade war has caused a great deal of pain to the economies of both countries, adding uncertainty to the macroeconomic environment.

But it remains to be seen if the Dow and the stock market can ride this piece of good news for a long time as questions are already being raised about the two countries putting pen to paper on a trade deal.

According to Linus Yip of First Shanghai Securities:

Before we see material evidence of an agreement, any trade headline will be seen as a short-term trading opportunity. We see good news coming out, and the market is reacting to that. I don’t know if it will last for a long time.

Dow spikes and the stock market gets ready to celebrate

Dow futures are up 135 points, or 0.49 percent, this morning at 8 am ET, pointing toward a strong day for the stock market ahead. S&P futures and Nasdaq Composite futures are also up by 0.37 percent and 0.43 percent, respectively.

Chart showing Dow Jones futures.
Dow Jones Industrial Average futures are up significantly, but the danger remains. | Source: Yahoo! Finance

Is it too early to celebrate?

There’s no denying the fact that the positive developments on a potential U.S.-China trade deal will be great news for the stock market and the Dow. But the same stock market and the Dow could come down crashing if it turns out to be a case of smoke and mirrors.

That’s because the latest development comes from the Chinese side and the U.S. will have to respond with an offer that the other party cannot refuse. A couple of days ago, the South China Morning Post reported that Beijing wants a firm commitment from Washington to reach a deal and lift the tariffs .

“The deal is not balanced yet,” the person said, declining to be named because of the sensitivity of the issue.

The Chinese believe that the U.S. is getting more concessions while being less responsive to China’s demands.

On the other hand, the Dow and the U.S. stock market will have to live in uncertainty as the actual signing of a potential trade agreement seems some time away. Reuters reports that the signing of the trade pact could be delayed until next month  when the leaders of the two countries meet after a NATO summit in London.

There’s a long gap between now and early December, and a lot could change during this time frame. For instance, the U.S. might not be willing to give China the concessions that the latter wants. The U.S. government will reportedly suspend the 15 percent tariffs on $160 billion worth of goods that are supposed to come into effect from Dec. 15.

But China might push the U.S. government to remove the existing 15 percent tariffs on $112 billion worth of Chinese goods that came into effect in September this year. Also, the Chinese government reportedly wants the 25 percent tariff that’s imposed on other goods to be reduced.

Such demands might not sit well with President Trump whose volatile nature has the potential to nix a trade deal. It was not long ago Trump called China a “threat to the world”  and claimed that the tariffs are not hurting the U.S. economy.

If Trump continues to hold such a belief, then he might not be willing to give China the concessions it might demand. That would be bad news for the stock market and the Dow.