An Inflection Point for the Markets, Just Days Away
Author: Greg Valliere
June 26, 2019
AN INFLECTION POINT: Once or twice a year, a major event sets the tone in financial markets for months to follow — and such an event is coming on Saturday, when Donald Trump and Xi Jinping meet in Japan.
PROGRESS THIS WEEK: High-level negotiators from both countries have made progress this week, and are preparing for the announcement that talks will resume. Most importantly, the U.S. reportedly is willing to delay the imposition of new tariffs, as reported this morning by the South China Morning Post. How long Trump will delay new tariffs will be crucial.
IF THE TWO LEADERS FAIL TO AGREE to new talks, the market reaction would be swift — negative for stocks (and both economies) with a near-certain rate cut from the Fed in July, and the likelihood of more easing moves in the fall and winter. If the two sides agree to more talks, the Fed would still be likely to ease next month and perhaps once more in the fall if inflation remains dormant.
THE DEVIL’S IN THE DETAILS: A friendly photo op and a resumption of talks does not mean a final deal is imminent; it almost certainly will not come this weekend, despite happy talk this morning from Stephen Mnuchin. A half dozen contentious issues remain, including an enforcement mechanism and China’s theft of U.S. intellectual property. The rhetoric from both sides has been bitter in recent weeks, and the tone on Saturday could be chilly.
SO WE WOULD CAUTION against unrealistic expectations. Trump puts a positive spin on everything, but a final deal is probably months away — and if talks drag on, Trump could throw more tariffs into the mix, a potential deal-breaker for China. We think Trump is in no great rush for a final deal, because the Fed will stay accommodative until there’s a signed pact.
A KEY FOR TRUMP is his political support in this ongoing trade war. Members of both parties have favored a hard line on China, but we sense a weariness in the farm belt and among U.S. businesses reliant on components from China. The uncertainty is becoming a major drag on the U.S. economy.
WE WILL STICK WITH OUR ODDS: A 40% chance of failure, either this weekend or in the fall; a 40% chance of a modest deal, and a 20% chance of a truly meaningful treaty with significant structural reforms. So there’s a 60% chance of a deal, in our opinion, in the next few months. The process should resume on Saturday, an inflection point that could ease market anxiety over a protracted trade war.
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