We are of the opinion that oil prices may continue to benefit from the positive developments in the US-China trade deal.
The US-China phase 1 deal is expected to be signed in the first week of January. The emerging deal, which covers all aspects of the economy, such as agriculture, currency, intellectual property protections etc. would represent the biggest single step by the two countries in 15 months to end a tariff war that has affected financial markets and slowed down the global economy.
Possibility of US-China trade agreement fuelled bullish sentiments in the market. We believe that oil prices may continue to benefit from the positive developments in the US-China trade deal. Prices have been rising since early December when the OPEC and allied producers pledged deeper output cuts. China imposed a 5 percent tariff on US crude oil shipments from September 1. It was the first time US oil had been targeted since the trade war between the world’s two biggest economies began more than a year ago.
Uncertainty around the signing of a trade deal between the United States and China boosted safe haven-flows into metal, gold and their prices rose above the key levels to hit their highest in more than two months.
Gold prices are directly proportional to increasing interest rates, which lifts its opportunity cost. The metal has gained about 17 percent so far this year and is on track for its best year since 2010, mainly due to the protracted tariff dispute and its impact on the global economy.
As an effect of this trade deal, it is expected that the US will suspend its new import taxes on commodities like smartphones and toys. US President agreed to reduce some existing US tariffs but maintain a 25 percent levy on some $250 billion of Chinese goods.
In an effort to reduce the fears of other countries from which China buys agricultural commodities, Chinese officials stressed that the agricultural commodities trading will not be impacted by the US-China trade deal. All the agricultural purchases by China will be in compliance with World Trade Organisation rules. Chinese officials are stressing upon the fact that expanding US-China trade will not affect the interests of other trading partner countries.
Still, uncertainty continues to persist, as market needs clarity regarding what the deal entails. The longer the market has to wait, the more likely market participants will start to question how good a deal it actually is. The recent news suggests that the deal will go through, but until and unless something is on the paper, uncertainty shall persist.
(The author is Head of Research at CapitalVia Global Research Limited- Investment Advisor.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.