Wall Street surged overnight, with the S&P 500 and Nasdaq indices hitting fresh records on news that the US and Mexico have agreed to enter into a new trade deal to replace the North American Free Trade Agreement.
The agreement puts pressure on Canada to also enter the deal if it wants to remain part of the three-nation pact.
US President Donald Trump threatened he still might introduce tariffs on Canadian-made cars if it did not join its neighbours.
“I think with Canada, frankly, the easiest we can do is to tariff their cars coming in,” Mr Trump said.
“It’s a tremendous amount of money and it’s a very simple negotiation. It could end in one day and we take in a lot of money the following day.”
Vehicle stocks soared and financial markets firmed on the expectation that Canada would sign on to the deal by the end of the week and ease the economic uncertainty caused by Mr Trump’s repeated threats that he would ditch the 1994 NAFTA agreement.
The US-Mexico discussions focused on new rules for the car industry – which Mr Trump has put at the heart of his drive to rework the trade pact (which he has repeatedly called a “disaster”) for American workers.
The deal would require 75 per cent of cars to be made in the NAFTA region, up from the current level of 62.5 per cent, a US trade official said.
The Trump administration said the deal improved labour provisions, in part by requiring 40-45 per cent of cars to be made by workers earning at least $US16 ($A21.80) an hour. That pay level that could remove incentives for automakers to move jobs to Mexico.
— Donald J. Trump (@realDonaldTrump) August 27, 2018
High political stakes for new deal
Negotiations between the three trade partners have dragged on for more than a year, putting pressure on the Mexican peso and the Canadian dollar.
The political stakes are high for all three countries.
Republicans in the US Congress are up for re-election in November, and they want to ensure farmers and other voters – whose jobs depend on trade with Canada and Mexico – that the deal is sealed.
Mexican President Enrique Pena Nieto wants to sign the agreement before leaving office at the end of November, while Canadian Prime Minister Justin Trudeau faces a national election expected by October 2019.
Canada plans to continue to negotiate, but would sign a new agreement only if it was good for the country, a spokesman for Canadian Foreign Minister Chrystia Freeland said.
Officials said they hope Canada will agree to the terms by Friday, when the White House plans to formally notify Congress that Trump will sign the deal in 90 days.
If talks with Canada are not wrapped up by the end of this week, Mr Trump plans to notify Congress that he has reached a deal with Mexico, but would be open to negotiations with Canada, US Trade Representative Robert Lighthizer said.
Some Republicans in the US Congress called the deal a positive step but said Canada must be part of the new pact to avoid hurting US jobs.
Stocks surge on US-Mexico deal
The benchmark S&P 500 rose 0.8 per cent to 2897. The tech-heavy Nasdaq lifted 0.9 per cent to 8018 points.
Technology stocks led the Nasdaq above the 8000 mark for the first time and the sector provided the biggest boost to the S&P.
The blue-chip Dow Jones index jumped 259 points, or 1 per cent, to 26,050 points.
The upbeat trade outlook was further boosted by news that Washington was pressuring the European Union to accelerate tariff talks.
Disputes between the US and its trading partners have been a drag on investor sentiment for much of the year despite solid economic fundamentals and two robust quarters of corporate earnings.
Share prices of traditional car companies such as Ford (+3.2pc) and General Motors (+4.9pc) surged.
However, electric car maker Tesla tumbled 1.1 per cent after its chief executive Elon Musk scrapped his plans to take the company private.
In the past three weeks, since Mr Musk tweeted about privatising the company, its share price has fallen by almost 15 per cent.
Australian market today
Australian shares were expected to start the day higher, with ASX futures gaining 23 points.
As the final week of reporting season unfolds, Caltex and Blackmore’s will report their results today.
The Australian dollar has risen slightly to 73.5 US cents, due to a weaker greenback.
“News of the US-Mexico trade deal fuelled risk appetite and led to a weaker US dollar,” ANZ’s Joanne Masters said.
“It is hard to extrapolate much out of it, as the US continues to treat each country and deal on its own merit.
“We remain wary of the current rally in risk appetite, and see it as short-lived.”