US-China trade deal is fake news, but markets won’t care
Shares have rallied hard on the chance of an agreement, so even small signs of progress will be welcome. However, the big picture is one of risky regime change.
May 12, 2025 – 8.52am
AFR Chanticleer
For a bloke who literally calls his social media posts “truths”, US President Donald Trump and his administration can be pretty fast and loose with the concept.
Shortly after talks led by US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng concluded in Geneva on Sunday night, the White House rushed out a statement: “US announces trade deal in Geneva”.
The details revealed nothing of the sort, of course. Indeed, the statement quoted Bessent saying that the details of the outcome of the talks would not be released until Monday night.
From what He told reports in Geneva, it appears that an agreement is basically one to keep talking. The two sides are set to announce some sort of mechanism to continue to hold further trade consultations.
There’s no suggestion of a tariff pause as Trump has given to other countries.
And there’s certainly no substantive trade deal as these things have been traditionally understood. Swallowing the spin
But none of that will bother financial markets, which will be more than happy to swallow the White House spin and keep rolling with the powerful rally we’ve seen since April 8, when the market bottomed after Trump’s “liberation day” announcement on April 2.
That rally appears to have been driven largely by retail investors and systematic trading. It has been built on nothing more than hopes that the economic damage from America’s effective trade embargo on China would eventually force the two countries to back down.
In that context, what we saw over the weekend was progress.
The US and China got in the same room, they talked for two days, things didn’t blow up, they’ve emerged singing from the same hymn sheet and sometime in the next day they will release a joint statement.
It’s not a trade deal or even a really a pause in hostility. But it’s also not enough to derail the rally. Indeed, sentiment may turn a touch more bullish given the positive rhetoric from both sides. ‘The timing doesn’t matter’
Even the Chinese indulged in a little Swiss spin. Chinese Vice Commerce Minister Li Chenggang told reporters the joint US-China statement would be good news for the world, whenever it was finally released.
“As we say back in China, if the dishes are delicious, the timing doesn’t matter.”
It’s enough to warm the cockles of an investor’s heart – particularly those who, in the words of Bank of America strategist Michael Hartnett, have front-run Trump’s tariff reversal so aggressively in the past few weeks.
He thinks that’s been the right tactic because Trump has little choice but to blink. The Trump administration is highly focused on America’s trade deficit, which hit a record $US140 billion ($218 billion) in March. But the problem is that tariffs could force the cost of funding a deficit much higher through a combination of higher inflation and a weaker US dollar.
“Nothing reverses US macro policy more quickly than the risk of 5 per cent or higher Treasury yields,” Hartnett says.
If anything, Hartnett argues, it may be a case of “buy the rumour” and “sell the fact” for equity markets. That is, this rally is probably reaching its upper limits and may fade as trade deals start getting announced, even if their substance is likely to be pretty fuzzy.
He argues the biggest catalyst for a “further bull run” is what Hartnett calls the three Cs – an actual China deal, rate cuts (both by the US Federal Reserve and China, which is already doing the most easing) and re-emerging signs of US consumer strength after the tariff dramas fade.
That combination will probably take some months to come together, with volatility likely in the meantime.
The bear risk? That Trump and the Fed can’t prevent Treasury yields spiking about 5 per cent. With global debt levels at $US324 trillion, the potential for “deleveraging contagion” is something to watch.
Unfathomable for two reasons
This column still finds it hard to understand how sanguine investors are about the tariff situation, for a couple of reasons.
First, even if we get to some deal, the average US tariff on the rest of the world is still going to be higher than it’s been in generations. That has to have repercussions for supply chains, for capital flows, for geopolitical tensions, for profit margins and ultimately share prices.
Second, no matter how delicious the dish is that the US and China cook up, there are no guarantees it won’t have a bitter aftertaste. Expecting any deal to hold under Trump seems risky.
But Hartnett also suggests we zoom out. Trump’s arrival has confirmed a big reversal of the trends that have driven sharemarkets for at least the past five years, and probably the past 20. Globalisation is reversing. Immigration, which has helped keep wages low and profit margins at record levels, is being limited across the world. Central bank independence is under threat. And the powerful tailwind of government spending, particularly in the US, is fading.
“The 2000 to 2020 status quo of capital outperforming labour [is] under pressure from a new trading system, new global financial architecture, polarised politics and nationalist geopolitics,” Hartnett says, pointing to the soaring price of gold as a warning of what’s to come.
The three great bear markets relative to gold in the past century occurred against similar backdrops – the 1930s period of the Smoot-Hawley tariffs and the Great Depression; the 1970s period of stagflation, oil shocks, and end of Bretton Woods; and the 2000s period of 9/11, China joining the World Trade Organisation and the rise of BRICs nations (Brazil, India, Russia and China).
Today, Hartnett points out, US stocks are at their lowest level versus gold since 2020.
It’s a time of great change. The progress in Geneva on the weekend is welcome. But it’s a small piece of a very large puzzle investors are sorting through.
