Signing of US-China Phase One Trade Agreement: What Is the Impact on Capital Markets?

[Asia Economy Reporter Song Hwajeong] With the signing of the Phase 1 trade agreement between the United States and China, attention is focused on how it will affect the capital market.

DB Financial Investment forecasted that this signing will lead to some improvement in fundamentals, a weaker dollar, and rising bond yields.

First, it is expected that the global supply chain, which had been damaged to some extent, will recover. Seongwoo Park, a researcher at DB Financial Investment, analyzed, "The trade environment will improve as the average tariff rate imposed by the U.S. on Chinese imports has fallen for the first time since 2018," adding, "If there is no meaningful progress in the Phase 2 agreement, the improvement will be limited, but the year-on-year global trade volume growth rate, which has remained in negative territory since June last year, will gradually recover, which is a factor for improving the fundamentals of countries with a high export ratio."

The dollar is expected to weaken, and bond yields to rise. Researcher Park said, "The increased trade volume from the improved trade environment will lead to a weaker dollar value, the Federal Reserve's asset purchases, and the downward stabilization of the dollar-yuan exchange rate behind the Phase 1 agreement will drive future dollar weakness," and added, "The won-dollar exchange rate is expected to fall below 1140 won by the end of the year." He further stated, "Bond yields are judged to have hit a bottom in early January from a medium-term perspective," and added, "The won-dollar FX swap is expected to rise an additional 20 to 30 basis points due to improved dollar funding conditions."

The impact on stock prices is considered neutral, as much of it has already been reflected in the prices. Researcher Park said, "What needs to be considered going forward is whether China will secure economic momentum outside of trade during the upcoming Phase 2 U.S.-China trade negotiations."

The future course is expected to be challenging. Researcher Park explained, "This negotiation seems to offer little advantage to China, and since there are differences in the positions of the two countries, the future course will not be smooth," adding, "The Chinese stock market is expected to maintain a positive trend for the time being, following a brief pause after the recent rise, supported by increased inflows of bank funds into the stock market, continuously launched stimulus measures, and expectations of the Lunar New Year effect."