Here’s what Wall Street thinks of the unfolding trade deal drama: ‘Potential for a bear market’

Investing

China tariff’s went into effect early Friday morning and Wall Street strategists were left trying to figure what’s next for their clients. Some fear an all-out trade war, others are waiting for China to retaliate before recommending action, while some were hopeful for a deal.

Stock futures were flat to slightly positive in premarket trading as traders awaited more news.

In a note to clients, Bank of America outlined three trade scenarios and its implications for the broader market.

“The worst-case scenario: an all-out trade war, with tariffs on the remaining Chinese goods, retaliation from China, and an increased risk of auto tariffs that could push the global economy into recession,” wrote Savita Subramanian.

“Under a deal, we expect the S&P 500 could rally above 3000 near-term…while under a full-fledged trade war, the S&P 500 could pull back 5-10% near-term, with potential to enter a bear market.”

“The next focal point for markets will be whether we see Trump and Liu actually meet. As mentioned, a potential release valve for sentiment would be if Trump and Xi speak on the phone following Liu’s visit,” Deutsche Bank said.

“We expect China to hike retaliatory tariffs, and the US to begin the process of imposing tariffs on all other imports from China, but further US tariff increases are still unlikely in our view and would likely take a couple months to implement,” said Goldman Sachs chief economist Jan Hatzius.

“Based on typical market responses to similar issues, we expect that: (1) under a “Benign” scenario (deal reached), the S&P 500 could rally above 3000 in the near term; (2) under a “Brinkmanship” scenario (tariffs rise to 25%; deal eventually reached in 2H19), the S&P 500 could pull back 5% ahead of an extended period of volatility; and (3) under a full-fledged “Trade War” (25% tariffs on all Chinese goods, strong threat of auto tariffs), the S&P 500 could pull back 5-10% in the near term (typical pullback on geopolitical strife), with potential to enter bear market territory in a global recessionary scenario. Note that the typical peak-to-trough decline during S&P 500 bear markets is 30%.”

“The tariff rate on the $200bn tranche of imports technically increased to 25% at midnight. In practice, the US will not collect these additional Customs duties for at least a few days and potentially not for a few weeks. This delay might provide an opening to reach an agreement in the interim, though challenges remain. We expect China to hike retaliatory tariffs, and the US to begin the process of imposing tariffs on all other imports from China, but further US tariff increases are still unlikely in our view and would likely take a couple months to implement.”

“The next focal point for markets will be whether we see Trump and Liu actually meet. As mentioned, a potential release valve for sentiment would be if Trump and Xi speak on the phone following Liu’s visit. Either one of those should at least dictate the direction of travel into the weekend and whether or not either side is willing to put a lid on further escalations for now.”

“We believe that although China will take retaliatory measures, it will not take steps to weaken RMB and both governments will express their willingness to continue with talks. However, we do not expect a new agreement to be reached in May but instead be pushed back until after the thirtieth anniversary of the Tiananmen Square incident on 4 June. During this period, we expect the market’s expectations to be fed by ongoing conversations between the two sides, via telephone conference and other means, and a steady stream of leaks from the US about “alternative measures” to reach a trade agreement. In this scenario, the market’s risk sentiment would not deteriorate more than it already has, in our view.”

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