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NAFTA Deal Reached: Will the TSX Soar?

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After a very tumultuous ride, the U.S. has reached a deal with Canada and Mexico on a replacement for NAFTA, which will be called the USMCA. Relations between the U.S. and Canadian leaders appeared strained, and there were concerns that the U.S. would only go ahead with a deal involving Mexico.

It was just last week that U.S. President Donald Trump stated in a news conference, “We’re very unhappy with the negotiations and the negotiating style of Canada,” as it looked like the two were nowhere near a deal.

But that all changed on Sunday evening when Canadian Prime Minister Justin Trudeau tweeted that it was “A good day for Canada and our closest trading partners,” without hinting at any specifics or even indicating that a deal was reached.

What does this mean for investors?

The TSX has been on a rough ride for much of 2018, but news of this deal should give it a much-needed boost.

For one, the deal is an important sign that relations between the U.S. and Canada might not be as poor as what may have been suggested over the past few weeks. Whether Canadians like to admit or not, at least in the status quo, our country needs a good relationship with the U.S. in order to be successful and for the economy to continue growing.

Another positive is that it provides companies with more certainty in their day-to-day operations, which will allow them to better plan for the future with a clearer picture of what trading with the U.S. will look like.

For a company like Magna International Inc  (TSX:MG)(NYSE:MGA), this is going to be welcome news, as although auto tariffs could still be imposed by the U.S., there will be an exemption provided to Canada as long as it stays under a quota, which is currently higher than what it exports to the U.S.

This is important for Magna because it provides the company with a bit more certainty around tariffs going forward and allows it to keep its day-to-day operations intact, knowing that it won’t be adversely impacted by doing so.

Still more work to be done

While it is a positive step to see a deal done, not every issue was addressed. Tariffs on steel and aluminum are still unresolved and Canada received no guarantees that they would be lifted. If and when it gets resolved is debatable, as unlike the pressure to reach a deal to replace NAFTA, there’s not the same urgency from both sides to get something done.

Bottom line

While the deal still needs to be ratified by all sides, this is certainly a step in the right direction for all three countries, as the lack of a deal could have been devastating for the markets. This should help rally the TSX out of its slump, as it was down more than 130 points on Friday when it looked a deal might not be reached and it was in danger of falling below 16,000. The new deal makes it safer to invest in Canadian stocks.

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Fool contributor David Jagielski has no position in any of the stocks mentioned. Magna is a recommendation of Stock Advisor Canada.

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