On Monday, May 23rd, US President Joe Biden unveiled a new trade pact with twelve Indo-Pacific countries called the Indo-Pacific Economic Framework (IPEF). The launching of this deal, coupled with Monday’s news that the Biden administration is considering the merits of rolling back tariffs on imports from China, saw the Dow close nearly 500 points higher on Monday while the DXY fell from 103.04 to 102.04. These significant movements have thus far extended through this week into a 1200+ point rally for the Dow and a drop in DXY below 102, fueled by further news such as a seemingly palatable FOMC agenda and optimistic economic growth predictions from the Congressional Budget Office. With this context in mind, let’s consider what IPEF could mean for US markets.
What We Know
The following countries are the initial partners: Australia, Brunei, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, Vietnam, and the US. Fiji will now be joining as well. The aggregate economic output of these countries is the equivalent of approximately 40% of the world’s GDP.
Significantly, this deal is not an actual free trade agreement, and thus there will be no traditional trade incentives between the US and its partners, as this would require action from Congress. Rather, the pact is ostensibly built on four ‘pillars’, which are, in no particular order: a) improving supply chains, b) encouraging infrastructure and green energy investment, c) promoting trade, and d) reformulating taxation and anticorruption measures.
What We Don’t Know
As many journalists have pointed out, we have few concrete details to work with just yet. While the broad brush strokes of the deal are sweeping, and could feasibly have all sorts of economic and geopolitical implications, negotiations have yet to deliver any concrete particulars, and thus traders and investors are currently in the dark when it comes to the minutiae and fine print.
While it is not fundamentally a free trade agreement or a trade bloc, it is not yet clear to what extent it could end up resembling one, or to what degree it could mirror the eventually ill-fated US involvement in the Trans-Pacific Partnership. It is also unclear how, if at all, the new agreement will compete with the Regional Comprehensive Economic Partnership (RCEP), a set of free trade agreements that have formed the largest trade bloc in the world, which includes most of the countries involved in the IPEF, as well as China and others.
Possible Market Outcomes
While it is too early to know what long-term effects the currently amorphous IPEF will have on US markets, it’s launching appears to have been a bullish fundamental catalyst for the stock market this week, and a bearish catalyst for the DXY. Rather than making any judgments about its consequences in these early stages, the wiser move would be for traders to keep their eye on the pact as it evolves over time, as it may be ripe with future fundamental catalysts.
However, it seems probable that the long-term outcome of IPEF will fall between two general possibilities: either 1) the deal could pan out to be relatively fruitless and toothless, and have little to no real impact on trade, foreign investment, and GDP growth expectations in the US. In that case, there would be little new to report on in terms of fundamentals and corresponding market volatility. Or, 2) the deal could gain traction and yield results somewhat comparable to a free trade agreement. Historically, this can entail increased GDP growth expectations, increased job outsourcing, increased trade deficits, and other conditions in the US that are relatively bullish for the stock market and bearish for the DXY, government bonds, and other safe haven assets. To what extent either of these transpire, we will have to wait and see.
The IPEF is a newly formed soft trade pact between the US and thirteen other countries, the economic output of which account for approximately 40% of the world's GDP.
It is not a free trade agreement, and the details of the framework have yet to be negotiated. However, it appears it may already have market-moving potential.
While traders can monitor the IPEF and its market implications as details gradually emerge, I anticipate it either having a long-term neutral effect on US markets or becoming a bullish catalyst for stocks and bearish for DXY and government bonds.
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