BMA Market Insights: Christmas Comes Early


What started with a strong U.S. November employment report that beat expectations and a Fed that forecasted no change in rates through 2020 led to the pinnacle of market elation last Thursday; phase-one of the U.S.-China trade negotiations have verbally been signed-off and agreed by both sides, (more below.) The U.K. voted itself out of the quagmire of a hung parliament giving the Prime Minister, Boris Johnson, a political majority and the risk of a no-deal Brexit now off the table, was the windfall that investors were hoping for. GBP/USD closed higher at 1.33 from 1.292 at the start of December.

As the markets were elated last Thursday, the on-the-run 10-year U.S. Treasury Note traded +10.6bps higher on the U.S.-China trade news before selling off -7.6bps on Friday, in a classic buy the rumor, sell the news strategy. The 10-year rate is back up +2.7bps to 1.85% this morning.

U.S.-China Trade War

Phase-one of the U.S.-China trade deal is verbally complete. We likely will not see the full details until next month. Here is what we know:


  • The December 15th tariff on $160 billion worth of Chinese goods, including cell phones, laptop computers, toys, and clothing, will not go into effect.
  • China canceled its retaliatory tariffs, including a 25% tariff on autos manufactured in the U.S.
  • The September 1 tariff on $120 billion worth of Chinese goods will be cut in half to 7.5%.
  • The U.S. tariffs on 25% on $250 billion worth of Chinese merchandise will remain unchanged (likely the carrot for phase-two of trade negotiations next year.)

Trade and Agriculture

  • China has agreed to increase purchases of U.S. products and services by at least $200 billion over the next two years.
  • China has agreed to increase purchases of U.S. agriculture products by $32 billion over two years, an average $16 billion in 2017.

Intellectual Property

  • China agreed to stronger legal protections for patents, trademarks, copyrights, including improved criminal and civil procedures to combat online infringement, pirated and counterfeit goods.
  • China agreed to follow through on previous pledges to eliminate any pressure for foreign companies to transfer technology to Chinese firms as a condition of market access, licensing or administrative approvals and to eliminate any government advantages for such transfers.


  • China agreed to refrain from competitive currency devaluations and to not target its exchange rate for a trade advantage (language that China has accepted for years as part of its commitments to the G20 major economies.)

How will this agreement be enforced?

  • Bilateral consultations starting at the working level and escalating to top-level officials. If these consultations do not resolve disputes, there is a process for imposing tariffs or other penalties.

In comparison, the highlights of the October 11 mini-deal principles are as follows:

  • China will purchase up to $50billion in U.S. agricultural goods.
    • China previously purchased approximately $9 billion in 2018, down from $25.8bn in 2012. 
  • China will boost intellectual protection, primarily for small and medium businesses.
  • China will commit to currency changes.
    • The agreement over currency will likely mirror commitments already made with the International Monetary Fund (IMF) standards.
  • The U.S. will suspend additional tariffs.
    • Tariffs on $250 billion of Chinese goods were supposed to go into effect last Tuesday, October 15. 

Key events coming up this week:

  • The Bank of Japan and Bank of England meet this Thursday to discuss monetary policy.
  • Federal Reserve district bank presidents including Robert Kaplan of Dallas, Eric Rosengren of Boston and John Williams of New York are scheduled to speak this week.
  • Revised U.S. GDP data are due Friday.
  • In equities trading, Friday will bring quadruple ‘witching’ in the U.S., the simultaneous expiration date of stock index futures, stock index options, stock options, and single stock futures.