(11 November 2019)DAILY MARKET BRIEF 1:Impeachment moves to next phase, progress on trade

Impeachment. The House Intelligence Committee held more closed hearings this week as part of the ongoing impeachment inquiry. The process will move to a more public phase next week when the committee initiates open hearings that will feature witnesses who have already testified privately. House Democrats hope the open hearings will bolster their case for impeachment, though we don’t anticipate any bombshells or even much new information to be revealed at the sessions. A House vote on impeachment still seems inevitable. Though the exact timetable remains uncertain, we expect a vote sometime next month. The House may end up scheduling a vote around the time of another big event like a potential government shutdown, a “phase one” trade deal signing with China (see below) or the year-end holidays. There is not really any good time for a vote like this.

US-China Trade.Progress continued this week as the two countries narrowed the list of items to be included in a “phase one” agreement that likely will be finalized in December. Both countries are very close to agreeing to specific provisions relating to large Chinese purchases of US agriculture, currency protections, additional market opening measures for foreign financial services providers in China, modest intellectual property protections and a reduction of some higher US tariffs. Additionally, higher US tariffs on Chinese consumer goods planned for December 15 will likely be delayed. The phase one agreement, if it is finalized, will be very modest in view of the more comprehensive universe of grievances and problems that divide the two countries on trade, but the markets don’t care. For now at least, they see any pause in the US-Chinese trade tension as very positive. This limited agreement will provide some good news and a respite from tensions as the tougher and more contentious issues are left to future negotiations (see below).

A Broader Deal.A phase one agreement seems imminent, but what about a second, third or final phase? Will any of those phases materialize? We are skeptical they will before next year’s US presidential election. The next phases will focus on more difficult and sensitive issues. And even getting to discussions on these issues will require no backtracking on phase one commitments, which is hardly a given. Moreover, both sides will need to feel political pressure for a bigger deal—Trump likely from cash-strapped farmers and Chinese President Xi from an economic downturn. The market will welcome the phase one deal, but that positive reaction may be short-lived.

We see continued friction ahead. As early as the first quarter of next year, renewed bickering may stall progress on a phase two agreement even as the administration continues to feel the need for a more substantial deal. Pressing China makes for good politics in the US, and phase one probably needs to be built on for President Trump to get any political credit for taking this fight on in the first place. So, enjoy the celebration over the phase one agreement when it happens, but beware of the volatility ahead as the negotiations move into their next chapter.

By UBS