Global stock markets have rallied recently amid signs a trade agreement between U.S. and China could emerge from the latest talks.
But analysts disagree on whether markets need the whole enchilada of a comprehensive deal to prevent a repeat of the fourth quarter selloff.
Some certainly think the trade war needs a full armistice before it will stop pressuring the market.
“At this juncture, I am not prepared to say the bull market will resume until we see a comprehensive trade deal between China and the U.S. and that comprehensive trade deal must manifest itself into the lifting of existing tariffs,” Hou Wey Fook, chief investment officer at DBS Private Bank, said on Monday.
“The vibes are coming out quite positive on this trade deal, but we really need to see something concrete, not just superficial,” Hou added.
There have been some recent signs of progress.
On Thursday, U.S. President Trump said on Thursday that an “epic” trade agreement with China was around a month away, with the deal “very complete.”
But even without a deal, other analysts have said the U.S. trade war with China may have lost its power to shock and awe markets.
James Sweeney, chief economist at Credit Suisse, said in late March that both governments have now seen pain from higher tariffs.
He attributed the “very bad” slump in global manufacturing since October to both actual tariffs and to expectations the U.S. would raise its tariffs on imported goods from China to 25 percent from 10 percent in January.
“I think a lot of orders were simply cancelled. I think a lot of firms put off investments and activity late last year,” Sweeney said at the Credit Suisse Asian Investment Conference in Hong Kong in late March. He added that expectations of higher tariffs were a driver of the global market selloff in the fourth quarter.
“Whether tariffs go down or not is less important than whether the market expects tariffs to go up and I think businesses now do not expect tariffs to go up in the near term and that can help lead to this improvement,” Sweeney said.
Others noted that waiting for this detente may have been China’s strategy all along.
David Daokui Li, director of the Academic Center for Chinese Economic Practice and Thinking at Tsinghua University, a former member of the monetary policy committee of China’s central bank and a sometime confidant of Chinese President Xi Jinping, called it the Chinese mentality.
Speaking on the same conference panel as Sweeney, Li recounted that in a small closed-door session with the Chinese president after the 2016 election, but before Trump took office, Xi said of the president-elect’s trade views: “people tell him this is hot, don’t touch; he doesn’t believe. He will be burned.”
“The good news is that President Trump already got the temperature of the issue of the trade; he knows that it is burning issue, don’t touch it,” Li said. “He’s very concerned about stock market. The stock market reacted very negatively to news on tariffs last October. That’s why he became concerned. That’s good news.”
Li said he expected the Trump administration would shift focus to individual cases against companies for specific issues, such as intellectual property theft.
Of course, even Hou, who said a full trade deal was necessary for a bull market, noted that equities may not face too much pressure ahead, for a fairly simple reason:
There aren’t many other places to park money for investments, especially with bond yields returning to negative territory in parts of the world.
To be sure, other trade threats from Trump could be the red sky in morning on the market horizon.
After briefly “crossing the streams” of immigration and trade with Mexico, Trump has retreated from his threats to close the border to trade with its Southern neighbor if illegal immigration continues.
But he’s issued a “one-year warning” to Mexico that he would impose tariffs on its auto exports to the U.S. if Mexico doesn’t step up drug and immigration enforcement.
To be sure, Trump just agreed to a deal with Mexico that included not imposing tariffs on autos.
Analysts are also concerned that once China ceases to be Trump’s trade bogeyman, the U.S. president will turn his eyes to Europe, potentially renewing threats to impose tariffs on German automobiles.