Global stocks gain on hopes of a US-China deal. Are investors jumping the gun?

Stock markets around the world climbed Friday on optimism about a potential ceasefire in the trade war betwe...

Posted: Nov 2, 2018 12:25 PM
Updated: Nov 2, 2018 12:25 PM

Stock markets around the world climbed Friday on optimism about a potential ceasefire in the trade war between the United States and China.

The biggest rises were in Asia. Hong Kong's Hang Seng Index surged more than 4% while China's Shanghai Composite and Japan's Nikkei both jumped about 2.5%.

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The positive momentum started after US President Donald Trump on Thursday talked up the prospects of a deal on trade with Beijing after speaking with Chinese leader Xi Jinping by phone. Trump said on Twitter that talks were "moving along nicely."

Asian markets then added to their gains after Bloomberg News reported that Trump has asked US cabinet officials to draft a possible trade deal with China ahead of a planned meeting with Xi at the G20 leaders summit in Buenos Aires later this month.

A spokesperson for China's Ministry of Foreign Affairs confirmed on Friday that Trump and Xi had made progress during a "deep discussion."

"I hope teams from both sides can implement the agreements achieved by the two countries' leaders," the spokesperson said.

Amid the buoyant mood, China's beaten down currency, the yuan, rose about 0.4% against the dollar. Major European markets gained around 1% in early trading, and US stock futures were up nearly 1%.

Global stocks are rebounding after a brutal October. But Friday's uptick came despite a lack of details on how Trump aims to reach a deal with Xi after months of exchanging economic blows.

Just this week, the US government struck at the heart of China's ambitions to become a global tech powerhouse by banning American companies from exporting parts and software to a major Chinese state-owned maker of computer chips.

Investors may now be letting their hopes get the better of them, according to some market watchers.

Michael Every, head of Asia financial markets research at investment bank Rabobank, said he suspected Trump's upbeat comments were aimed at boosting market sentiment ahead of next week's crucial midterm elections.

"This seems a perfect way to ensure equities rally into election day, put Xi into a box in terms of what is expected of him in the terms of the deal ... and then have someone to blame when the deal then falls through," Every said in an email.

The United States has slapped tariffs on over $250 billion of Chinese exports this year and is threatening more. China has retaliated with its own tariffs on more than $110 billion of US goods.

The Trump administration says it's trying to pressure Beijing to make deep changes to its economic policies, accusing it of overseeing the theft of US intellectual property and unfairly boosting Chinese companies through aggressive industrial programs.

China's efforts to get hold of American technology are "an existential threat" to the future of the US economy, according to US Trade Representative Robert Lighthizer.

Analysts are highly skeptical that China will agree to major changes that would address the US concerns — especially at such short notice.

"These are longstanding structural issues within the Chinese economy and cannot be reversed overnight," said Logan Wright, Hong Kong-based director of China research at research firm Rhodium Group.

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