On the first trading day after the G20 summit meeting in Buenos Aires, risk trades have jumped, with some of the largest single-day increases seen in years.
The Dow Jone added 287.97 points, or 1.13%, the SP500 rose 30.2 points, or 1.09% (the largest single-day climb in seven years), and the Nasdaq added 110.98 points, or 1.51%. On the commodities side of the spectrum, crude oil futures settled at $52.95 a barrel - up nearly 4% - while the Forex market saw the US dollar fall as China's offshore yuan (CNH) gained about 1%.
What prompted the rally? A trade truce agreed upon by US president Donald Trump and Chinese premier Xi Jinping.
The markets clearly liked the news as global stock markets in Asia, Europe and the US gapped higher at the open. Even commodity currencies like the Australian dollar surged higher on the news.
However, can a trade truce really last? What else was agreed upon at the G20 and what's the next step for the market? Let's find out.
The Trade War Background
Both sides have imposed trade tariffs on each other on billions of dollars' worth of goods. In July 2018, the US hit China with $250 billion worth of tariffs on goods exported to the US. China retaliated by placing tariffs on $110 billion worth of US goods exported to China.As the trade war escalated, markets were even more nervous after Donald Trump then threatened another round of tariffs on $267 billion worth of Chinese exports if talks in Buenos Ares were not successful. To understand how large this is, it's important to understand the existing levels of trade tarrifs. As of 2018, the US already applied tariffs of $53 billion to imports from China. That increased to $200 billion on September 24, 2018, and the threatened $267 billion is in addition to that. When it comes to Chinese imports from the US, there were already $50 billion of tariffs already in place in 2018. An additional $60 billion was added to this figure on September 24, 2018.
The details of the US-China accord at the G20
In a White House statement, it stated that Trump and Jinping had a "highly successful meeting". It goes on to say that US tariffs on Chinese goods will remain unchanged for a period of 90 days. However, if by this time an agreement isn't reached then the US will increase the current 10% tariff to 25%.
The statement also says that China agreed to "purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial and other products from the United States to reduce the trade imbalance between our countries".
However, the negotiations that are due to take place within the 90 days are much more difficult as it involves intellectual property protection, technology transfers and cyber intrusions and thefts.
What's next for the markets?
While the markets enjoyed the announcement of the US-China accord, it may be short lived as many believe the most challenging time lays ahead. Why? Because Trump's version of events, the White House statement and what has been published in Chinese state media are all different.
Most stock markets, such as the SP500, already started to give back some of their gains as the US session opened up on the first trading day after the G20 summit.
Source: Admiral Markets MT5 Supreme Edition SP500 CFD, H1 - Data range: from 29 November 2018 - 3 December 2018 - performed on 3 December 2018 at 3:17 PM GMT
If we take a bigger picture look at the SP500 CFD, we can see the market has run into some trouble as it trades in between support and resistance levels.
Source: Admiral Markets MT5 Supreme Edition SP500 CFD, H1 - Data range: from 29 November 2018 - 3 December 2018 - performed on 3 December 2018 at 3:20 PM GMT
Some traders may choose to lean against the support and resistance levels, highlighted by the blue lines, keeping the market in a tight range. After all, the next round of tariffs may have been held back but only for 90 days. There is still much to negotiate between the US and China.
However, if developments can be made in negotiations, then traders may consider trading a breakout strategy of the upper resistance line targeting the previous all time high.
What else happened at the G20 summit?
While markets have predominantly been focusing on the US-China talks, there were other side meetings at the G20 summit. One of the other major news announcements was from Russia and Saudi Arabia regarding the oil market.
Russian president Vladimir Putin and Saudi Arabia's Crown Prince Mohammed bin Salman both agreed to extend fresh output cuts into 2019 helping oil to gap over $2 higher. Their joint effort is in response to the near 30% plunge that has affected oil markets.
While both heads of states have committed to 'rebalancing' the oil market, no details were given on the size of the cuts or how long they would continue for. However, UAE energy minister Suhail Al Mazrouei said he was "optimistic" that the next meeting of OPEC+ members could reach an agreement on the technical terms over a cut in production.
Source: Admiral Markets MT5 Supreme Edition WTI CFD, Weekly - Data range: from 27 September 2015 - 3 December 2018 - performed on 3 December 2018 at 3:20 PM GMT
Prices of WTI oil have been in a free fall since reaching a four year high in September 2018. However, all eyes will now be on the technical support level highlighted in blue. Traders will be looking for clues on whether the market is ready to bounce at this point or whether the market will break and continue lower.
How Traders Can Take Advantage
Markets tend to become more volatile around high impact news announcements such as trade tariffs. This can represent strong opportunities for seasoned traders. However, more volatility can result in higher trading risks, so proper risk management and volatility protection is essential.
As always, trading is about making decisions. Some traders will be going long, some short and some will just stay out. What will you be doing?
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