Stocks are likely to see a temporary relief rally and bonds could sell off if there is a ‘ceasefire’ declared in the trade wars by the U.S. and China this weekend, but the damage to the global economy could continue until a tariff-ending deal is struck.
The meeting, at the G-20 summit, is so important that market pros broadly see it as an event that could affect the course of markets for the rest of the year; impact the trajectory of global economic growth, and help determine when and what actions the Federal Reserve and other central banks might take.
“You just amp up the odds even greater that we’re going to have a global recession, if there’s no detente between the U.S. and China. With respect to G-20, I don’t think there will be anything negative, and it will probably be a ‘kumbaya’ moment,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group.
While few expect an absolute failure at the meeting, UBS economists said if that were the case and the trade war escalated with new tariffs, the world could see a recession-like slowdown in growth.
If the trade war escalates, “we estimate global growth would be 75 [basis points] lower over the subsequent six quarters and that the contours would resemble a mild ‘global recession’ —similar in magnitude to the Eurozone crisis, the oil collapse in the mid-1980s and the ‘Tequila’ crisis of the 1990s,” UBS global head of economic research Arend Kapteyn wrote in a note.
Ceasefire scenario
An unnamed Trump administration official told Reuters on Tuesday that U.S. goals for the talks are to reopen negotiations and there could be a possible agreement on no new tariffs. The official said the U.S. would like negotiations to resume where they broke down in May.
Boockvar said markets should react positively to a “ceasefire” scenario, and stocks could rally, while bond sell off and the dollar could bounce. “The fact tariffs are still on will limit the extent of that relief rally,” he said. “If all of a sudden people say the Fed won’t have to be as aggressive because there’s potential for a trade deal, then you will see an adjustment in the bond market.”
Grand bargain?
Bank of America Merrill Lynch economists say there is little chance a “grand bargain” can be reached in Osaka, and in fact the Trump administration has lowered expectations for one. They noted that for instance, Commerce Secretary Wilbur Ross said that “the most that will come out of the G-20 might be an agreement to actively resume talks.”
“Another reason to fade the chances of a breakthrough is that the US administration is not under much pressure to compromise at the moment. Our framework for the trade war has consistently been ‘no pain, no deal.’ With the stock market near its all-time high, markets expecting a strong ‘Powell put’ and GDP growth running at more than 3% yoy, the US is likely to try to drive a hard bargain. Like it or not, the Fed’s dovish message of offsetting downside risks encourages trade war escalation,” the BofA economists noted.
Reference: CNBC
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