What's going on?

On Thursday, the US and China agreed to reduce trade taxes (a.k.a. tariffs) on each other�s goods. It�s one small step for trade-kind towards a long-hoped-for deal between the two biggest economies on Earth.

What does this mean?

Both countries have been trading, er, trade blows for years now, costing both economies growth � but recently, cooler heads appear to have prevailed. Tariff increases have paused; instead, the US and China are discussing lowering some taxes and potentially removing others altogether. It�ll likely happen in stages � the first of which is now due to be signed, sealed, delivered next month. Lower tariffs will make it cheaper for both countries to buy each other’s products, which should encourage spending by governments and companies alike � boosting earnings and economic growth.

Why should I care?

For markets: Optimism on a record high.

Keen-eyed investors who�d previously seen a partial deal in the offing bought up stocks in China, Europe (a third of the region�s economy depends on China), and the US � where stock prices hit record highs earlier this week. After a brief fall � on news that confirmation of a US-China deal wouldn�t come as soon as hoped � Thursday�s announcement pushed US stocks up to a new record high.

The bigger picture: Stubborn investors might cause a �melt up�.

Earlier this year, investors thought the US central bank would increase interest rates � which would make it harder for companies to grow profits � rather than cut them thrice as it has. That wrongfooted several investors and analysts � including those at Saxo Bank, which this week sheepishly reversed its previously negative opinion of stocks. Investment managers � especially at the end of the year, when they report their own performance � are loath to be wrong for too long. And as some change their minds and buy stocks, their new demand for shares could push prices up further � a.k.a. a melt up (tweet this).