Markets get some relief, but dangerous times lie ahead

US bond rates rose and the US dollar fell in response to the deal, signalling the return of a “risk on” environment while in the UK the FTSE 100 climbed 2.3 per cent after the Conservative landslide removed the uncertainties around Brexit, along with Jeremy Corbyn and his radical agenda to remake UK capitalism.

US purchasing managers’ data showed business activity, order books and jobs growth hit five-month highs in November, suggesting the slump in US manufacturing generated by the trade war might be finally bottoming out.

More surprising was China’s economic data, with industrial output rising 6.2 per cent in November relative to the same month last year. That was well above economists’ forecasts and a major improvement on the 4.7 per cent increase in October. Retail sales were up 8 per cent, again an improvement on October’s 7.2 per cent and were again solidly ahead of forecasts.

China’s authorities have lowered borrowing costs, injected liquidity into their system, lowered some highly-targeted taxes on business activity and encouraged increased infrastructure investment to counter the impact of the US tariffs on exports.

It now seem likely that, where previously there were expectations that China’s GDP growth in 2019 would have a “5” in front of it, it will now come in around 6 per cent. While that would be its lowest growth rate in nearly three decades, given the context – the trade war and China’s own efforts to deleverage an over-leveraged economy – it would be a respectable outcome.

The one black spot in what was otherwise a bullish day for markets and the real global economy remains Europe, where manufacturing activity in the eurozone continues to shrink, as it has done each month this year. While services activity is holding up the overall picture in Europe is one of stagnation.

If the US trade deal with China can be signed and nothing much happens in relation to Phase two (the role of the state in China’s economy is the major issue and one China won’t compromise on) at least until after next year’s US elections, the year will end on a more optimistic note than the one on which it started 2019.

It is in Trump’s interest not to rattle the markets as his presidential re-election campaign heats up, although he might believe that combining his “victory” over China with an assault on the European Union would play well with his base.

Trump is very attuned to movements in the stock market. He takes credit for every record the market has achieved, appearing to see the 22 per cent gain in the S&P 500 this year as a barometer and endorsement of his successes.

With the markets now convinced that the moment of “peak tariffs” has passed any resumption of the administration’s trade wars could have an exaggerated impact.

The trade war didn’t just inject volatility into financial markets, which became extremely sensitive to every development and every Trump tweet on the subject, but actually harmed the global economy. Global trade volumes have shrunk and global GDP growth reduced.

Given that Trump and the trade hawks in the administration continue to see trade as a zero-sum game, with only winners and losers, and tariffs as the weapon in their “America First” protectionism, it is unlikely that the cessation of hostilities (or perhaps a pause in hostilities) in the conflict with China will see world trade and growth rebound quickly.

The trade war was, of course, about more than trade. There will be lasting tensions and the potential for flare-ups now that the US has decided it needs to curtail China’s economic and geopolitical ambitions.

In the UK and Europe, of course, Brexit has yet to be effected. Whatever the longer-term benefits might be, the near term impacts are unlikely to be positive for either the UK or eurozone economies.

Thus, while the year appears to be ending on a more optimistic note than appeared likely for much of the year, the overall outlook remains subdued and threat-laden.