The short-term recovery of the Dow Jones is said to have been triggered by two major catalysts: the increasing likelihood of the Federal Reserve dropping the benchmark interest rate by the 3rd quarter of 2019 and the announcement of a trade deal with Mexico by the U.S.
U.S. President Donald Trump officially announced the establishment of a signed agreement with Mexico on June 8 that includes a promise from the government of Mexico to take strong actions against migration through the southern border of the U.S.
President Trump said:
I am pleased to inform you that The United States of America has reached a signed agreement with Mexico. The Tariffs scheduled to be implemented by the U.S. on Monday, against Mexico, are hereby indefinitely suspended. Mexico, in turn, has agreed to take strong measures to stem the tide of Migration through Mexico, and to our Southern Border.
This is being done to greatly reduce, or eliminate, Illegal Immigration coming from Mexico and into the United States. Details of the agreement will be released shortly by the State Department. Thank you!
The swift achievement of a deal with Mexico following the unexpected fallout between the U.S. and Mexico could set an important precedent in the U.S.-China trade talks.
When President Trump initially declared the breakdown of the country’s existing trade deal with Mexico, several strategists stated that the fallout could intensify the reluctance of Chinese negotiators to work towards a full accord, which initially led the Dow Jones to slip.
The Economist Intelligence Unit chief economist Simon Baptist, for instance, said that the unilateral decision of the U.S. to negotiate a new deal with Mexico may damage its credibility amidst an ongoing trade dispute with China.
“Trump’s tariff threats to Mexico are going to make it more difficult to reach a trade deal with China, as they damage the credibility of the US as a negotiating partner. [China may now] see even less point in trying to reach a deal, and will certainly be less willing to make meaningful concessions as it is hard to see a credible mechanism to bind Trump to any deal,” he told CNBC.
However, with a deal with Mexico reached in a short time frame and the possibility of a rate cut by the Fed, analysts foresee the U.S. having a stronger leverage going into a new potential round of trade talks with China that may grow the confidence of investors in the Dow.
According to Mateos y Lago, the deputy head of BlackRock’s Official Institutions Group, a trade deal in 2019 between the U.S. and China is likely, a fundamental factor that could push the Dow Jones to secure newly established momentum.
Although the prospect of a comprehensive trade deal would alleviate significant pressure on the global economy and reduce geopolitical risks, Lago emphasized that strategic issues in the tech sector will not be resolved with a full accord.
“We do think a trade deal will happen, but let’s be very clear: Will it solve all the underlying tensions between the U.S. and China, in particularly the more strategic issues present in the tech sector? We don’t think so,” said Lago.
As the European Central Bank considers the possibility of declining the eurozone’s benchmark interest rate and the Mexico trade deal recovers the credibility of the U.S. to a certain extent, the stock market is likely to maintain its momentum in the foreseeable future.
Last modified: July 2, 2020 7:26 PM UTC