Trade Truce a Relief to Markets — For Now

Stocks and other risky assets are likely to enjoy a brief rally after the emergence of what appears to be a U.S.-China trade truce, analysts said. However, the longer-term outlook depends on what kind of lasting deal can be struck by the two largest economies, and how this could affect interest rates.

President Trump and Chinese President Xi Jinping reached a cease-fire in their trade battle, after meeting on Saturday in Japan.

The two sides said bilateral talks would resume and the U.S. would indefinitely shelve plans to levy duties on the roughly $300 billion of Chinese imports that aren’t currently covered by 25% tariffs. In addition, Mr. Trump said he would let U.S. firms sell high-tech equipment to Huawei Technologies Co. and China would start buying large amounts of American farm products.

Vasu Menon, senior investment strategist at OCBC Bank’s wealth-management unit in Singapore, said the truce “should be a positive in the short term for markets.” But it wasn’t clear if the two economic giants could eventually reach a longer-term agreement, he said, and a key question for investors was whether Saturday’s trade pact made the Federal Reserve less likely to cut interest rates.

“The interplay between U.S.-China tensions, Fed policy and global growth data will mean that markets will stay volatile in the coming months even if we see a relief rally with the latest outcome between Trump and Xi,” Mr. Menon said.

Mansoor Mohi-uddin, senior macro strategist at NatWest Markets in Singapore, said the truce was likely to lift stocks, commodities, and emerging-market assets at the expense of haven currencies like the dollar, yen and Swiss franc. In a note to clients, he said markets were unlikely to reduce their expectations for Fed rate cuts significantly, despite easing trade tensions.

To be sure, tensions could ratchet up again, as they did in May, surprising many investors who thought the two countries were nearing a major deal. And for now, tariffs on another $250 billion a year of Chinese goods remain in place.

A better trade outcome ought to make investors think twice about the support markets will get from central banks, although this weekend’s limited progress would not be not enough to shake market faith that the cuts are coming, said Tomas Hirst, analyst at CreditSights in London.

“Commitment to continue talks won’t provide much confidence that a deal is imminent given past experience, but the apparent avoidance of escalation helps clip some of the more severe tail risks,” he said.

Salman Ahmed, global strategist at Lombard Odier IM, said the issues between the two sides remained deep in spite of the relief given to Huawei. “There are already signs of changes being made to supply chains: The question in coming months is if unreliability in policy is as bad as a frontal conflict” for economies, he said.

“This weekend will be a short-term positive for markets.”

Others said the progress was disappointing. Olivier d’Assier, head of applied research for the Asia-Pacific region at Axioma, which sells analytical tools to asset managers, said the deal to restart talks was a “weak outcome” that investors shouldn’t necessarily celebrate.

“It falls far short of the specifics we were hoping to get in terms of a timetable for talks, a deadline for finalizing the negotiations and a framework for rolling back the existing rounds of tariffs,” he said. “In other words, things are not going to get worse in the short term, but this monkey is by no means off our backs.”
Source: Dow Jones