Xi-Trump meet could inspire Santa Claus to return to Wall St

THE traditional year-end rally was delayed this year because of trade-war and interest-rate fears. But an amicable meeting between President Donald Trump and President Xi Jinping was enough to reduce fears that global economic growth would be wiped out by a new Cold War.

The annual December rally looks set to recur this year after Presidents Trump and Xi agreed over dinner in Buenos Aires to suspend all further tariff increases while new negotiations on contentious issues proceed. The US will maintain 10 per cent tariffs on US$200 billion of Chinese imports but will not raise the rate to 20 per cent as threatened, unless there is no progress on structural trade issues over the next 90 days.

Although the dinner between the leaders of the world's two biggest economies at the Group of 20 meeting in Argentia did not yield a formal deal, the reopening of lines of negotiation was enough to celebrate.

"It's most likely there would be a continuation of this discussion," said Quincy Krosby, chief market strategist at Prudential Financial. "The key for the market is that the US does not impose the 25 per cent tariff in January."

Ms Krosby said few market watchers had anticipated the "best-case scenario" where "both sides ironed out conditions for agreement". "That's not expected even remotely."

That's because the differences between the China and the US go beyond the tit-for-tat tariffs to issues of intellectual-property protection and market access.

"These are far more fundamental to the Chinese trade system, so that's going to take some time," said Ms Krosby.

With the surge last week, US stocks returned to positive territory for 2018 after Federal Reserve chairman Jerome Powell changed course on the outlook for interest rates.

The Dow Jones Industrial Average rose by more than 600 points on Wednesday after Mr Powell said that US interest rates were close to "neutral" level where they would neither constrain nor heat up the US economy.

"While it's difficult to quantify neutral interest rates, the signal the markets got is a Fed turning dovish," said Hussein Sayed, chief market strategist at foreign-exchange firm FXTM, in a note to clients.

There was also a change of heart on technology, industrial and materials stocks because of more optimism about the outlook for trade between the US and China. Apple was in bear-market territory for much of November after President Trump warned that the company's iPhones could be included in the next round of tariffs.

After Saturday's rapprochement between Presidents Trump and Xi, Apple could be one of the biggest beneficiaries of a Santa Claus rally.

It's not just the technology sector that has seen volatility. Oil prices fell by more than 20 per cent in November, the worst monthly performance in a decade, as traders reversed bets that Iranian sanctions would constrain supply and concentrated on fears about demand. One oil-market analyst said the behind-the-scenes negotiations between Saudi Arabia and its allies could decide whether Santa Claus comes for the energy sector.

"Forget about the Opec meeting and the weak economic data out of China and India for the moment and focus on the changing dynamics of the global oil market," said Phil Flynn, senior market analyst with the Price Futures Group, in a note to clients. "The Russians are playing hardball with Saudi Arabia, but will agree to a cut if the Saudis take the biggest slice of the pie."

Whether stocks finish in the green or red for the year hinges on the investor response to two December events, said Michael Arone, chief investment strategist for the US SPDR unit of money manager State Street Global Advisors.

The first was the Trump-Xi meeting. There, the worst-case scenario - the outright declaration of economic war, which was hinted at during the Apec summit - has been averted.

"Second, after likely raising the target federal funds rate for the fourth time in 2018 by another quarter point on Dec 19, will the US Federal Reserve (Fed) signal a slowing to planned rate hikes in 2019?" asked Mr Arone, in a note to clients.

The likelihood is of a strong finish to the year for US stocks. After Santa Claus leaves, however, volatility could return early next year.

There are signs that the uncertainty over trade and tariffs has already broken the momentum in global economies. The talk now is not whether there is going to be a slowdown in global growth but how bad the slowdown will be.

"The main story for 2019, in our view, will be a concerted slowdown in GDP growth across major economies," warned strategists at brokerage BNP Paribas, in a note to clients.