Over the last two years, the brewing trade war between the U.S. and China has created uncertainty for businesses and investors with mixed results. On the negative side, it has reduced business investment and hurt economic activity with the pain concentrated in the industrial and agricultural sectors. This combustible variable in combination with a slowdown from the business cycle turning led to many fearing a recession translating into interest rates dropping, the yield curve inverting, and cyclical stocks experiencing steep losses.

On the positive side, lower interest rates have been quite positive for many financial assets with stocks hitting record-highs. In fact, the abundant liquidity in concert with excess, bearish sentiment has resulted in stocks basically pricing in a trade deal and improved economic conditions well before they have actually materialized.

Recent Developments

Given these lofty gains, stocks are particularly vulnerable if either condition doesn't materialize, and recent trade-related developments have slightly reduced the chances of a successful deal. The most important may be the bill expressing support for the Hong Kong protestors which President Donald Trump signed last week. According to reports, Trump was not in favor but ended up signing, since it would have been likely his veto would have been overridden by Congress.

While this is a negative development, one positive development is that South Korea and the U.S. have significantly backed off on its military partnership and dual engagements in the Pacific. This is seen as a concession to China and North Korea. Another positive regarding the trade deal's odds is continued deterioration in China's industrial economy which bears the brunt of the trade war.

While China's economy continues to deteriorate, the U.S. economy remains firmly in growth territory, and the stock market is making all-time highs on a regular basis. Further from a price action perspective, stocks tend to rally on positive trade news and briefly dip on negative news. It seems that equities are very confident that a resolution will be reached.

Yet, soybeans are telling a different story. Given that one crucial element of the "Phase One" Trade Deal is an agreement from China to buy a specific amount of soybeans from farmers, the soybeans chart is another proxy for the odds of a trade deal. In recent weeks, soybeans have been weakening. In fact, they have given up nearly all their gains from when the trade deal was announced.

Overall, traders should be wary. Many financial assets have basically priced in a successful deal. The strong stock market and a healthy U.S. economy may thwart Trump's willingness to reduce or eliminate tariffs. China may also be less willing to make any concessions given what it sees as U.S. unnecessarily getting involved in the Hong Kong situation.