In a major boost to free trade, the United States and China just came to an agreement. This is what will convince them to stop their intensifying trade war. This economic crescendo, declared at the beginning of this week, reinforces the need for cooperation, respect and dignity between the two economic titans. As markets absorbed this announcement, they came back to life with a bang, showcasing that investors are showing a much more optimistic outlook.
The pause in hostilities comes at a very opportune time, as traders digest some very important economic data. They are especially fixated on the just-released Consumer Price Index (CPI) report from the U.S. As released, the data pointed to inflation being much softer than expected. Consequently, the value of the U.S. Dollar dropped. Now traders are closely monitoring the U.S.-China honor amongst thieves pact. They are indeed worried about the lack of more specific, binding commitments from negotiators on both sides.
In the wake of the euro-dollar trade truce announcement, the euro rallied against the dollar. The EUR/USD pair continued its bid tone above the 1.1100 level, keeping small gains in-tact on Tuesday. Weaker U.S. Dollar Assuming USD Reversal Analysts are saying this stronger move upward is being caused by the weaker U.S. Dollar. Market participants are now carefully recalibrating their expectations in light of this changed backdrop.
Looking at the commodities market, gold as well turned bullish last week. Following the release of the U.S. CPI data, gold prices held onto their daily advances around $3,240 per troy ounce. On Tuesday, gold surged back above $3,260, which tracks investor sentiment that is growing more bullish as the situation continues to unfold. Its precious metal’s miraculous recovery is a sign that sentiment is turning. It’s a surprising turnaround from the doom and gloom that had pervaded the market throughout earlier this week.
Market analysts note that while the U.S.-China trade truce is a welcome development, it underscores timeless investing truths about market volatility. The cryptic language in the agreement raises major concerns about its long-term viability and real impact. These uncertainties give rise to fears that new conflict might break out. Should such tensions develop, they would likely drive gold bullion back toward last month’s record high prices.
Even with the optimism from the trade truce, sentiment remains defensive among traders. There is great trepidation at the prospect of backpedaling due to weak pledges or confusion between the two countries. The ambiguous language of the U.S.-China deal could fuel further hostilities. Such friction would be likely to have a profound impact across many markets, from currencies to commodities.