China-US tariff cancellations lifted global stocks, but how sustainable?

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Global Stocks Rally on Tariff Cancellation Hopes, Sustainability Questioned

Global stock markets experienced a significant uplift following China's announcement of an agreement with the United States to phase out tariffs. This development spurred rallies across equities worldwide, with major indices like the Dow and S&P 500 reaching record highs. However, the sustainability of this rally has been called into question amid reports of internal White House opposition to rolling back existing tariffs, suggesting potential headwinds despite initial optimism.
Initial Surge Driven by Trade Deal Expectations

The initial market reaction was overwhelmingly positive, with oil prices also seeing an increase. China's statement regarding phased tariff cancellations was interpreted as a crucial step towards resolving the prolonged trade war. This optimism propelled a global equity performance gauge to a 21-month peak, while a pan-European index hit its highest level since July 2015. The US dollar also strengthened as investors moved away from safe-haven assets like the Japanese yen, Swiss franc, bonds, and gold, indicating a heightened "risk-on" sentiment.
Doubts Emerge Over Tariff Rollback

Despite the initial enthusiasm, gains in US stocks were partially pared following reports that rolling back existing tariffs faced significant opposition within the White House and from external advisors. This internal friction suggests that the extent of tariff cancellations, particularly those scheduled for December 15 on approximately US$156 billion of Chinese imports, might be less comprehensive than initially hoped. The idea of a tariff rollback was reportedly not part of the original agreement between Chinese Vice Premier Liu He and US President Donald Trump.
Limited Alternatives Fuel Equity Investment

The current market environment presents investors with limited attractive alternatives to equities. Returns from money markets and long-term government debt are reportedly below the rate of inflation, making them unappealing. This scarcity of high-yield, low-risk investments has led to capital being channeled into the stock market, a trend driven by central bank policies. Consequently, the fundamental justification for the current market increase is considered weak by some strategists, given a slowing global economy.
Market Volatility Linked to Trade Headlines

The overall market sentiment appears to be heavily dictated by trade-related headlines, creating a "risk on, risk off" dynamic. The benchmark 10-year U.S. Treasury note yield saw an increase, rising to 1.919 per cent, while US gold futures settled down. Similarly, oil prices, including Brent crude and West Texas Intermediate, experienced gains, reflecting the broader market's response to perceived progress in trade negotiations. This sensitivity to news suggests that market stability remains contingent on continued positive developments in the US-China trade relationship.

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China-US tariff cancellations lifted global stocks, but how sustainable?

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