Markets Say Most of the Bad News on Trade Is Already Out There
(Bloomberg) -- The bad news is that China and the U.S. are busy slapping tariffs on each other. The good news for now is that investors seem to think that’s about as far as it will go.
U.S. stocks rebounded Tuesday from the worst sell-off in four months, while European indexes advanced as investors bet China and the U.S. will eventually reach a deal. Treasuries, gold and the yen retreated as the clamor for havens eased off. The reversals come with a dash of speculation that the rout in risk assets had gone too far too quickly.
“Once again, investors are flocking back to the hospital seeking relief from the post-traumatic stress disorder they’ve suffered from since the financial crisis of 2008,’’ wrote Ed Yardeni, president and chief investment strategist at Yardeni Research. “Ever since then, they’ve experienced recurring panic attacks, fearing each time that another crisis is imminent. When nothing terrible happened, the panic attacks were followed by relief rallies.’’
While the U.S. and China’s positions on trade appear to have become more entrenched, the past 48 hours have strengthened the view that the world’s two biggest economies want to keep talking and work toward an accord. The risk recovery began after President Donald Trump said he was prepared to meet his Chinese counterpart, Xi Jinping, at the G-20 summit next month. He continued in a somewhat conciliatory tone on Tuesday.
“When the time is right we will make a deal with China,” Trump tweeted. “My respect and friendship with President Xi is unlimited but, as I have told him many times before, this must be a great deal for the United States or it just doesn’t make any sense.”
Concern that trade tensions between the U.S. and China would eventually weigh on global growth and corporate profits sent the S&P 500 Index tumbling back toward 2,800 on Monday, a familiar battleground where bulls and bears alike have found relief or resistance since the start of 2018. The benchmark index held this key technical level amid Monday’s drubbing.
The S&P 500 rose 0.8% to 2,835.43 as of 10:20 a.m. in New York on Tuesday, in line with the gain for the Stoxx Europe 600. Ten-year Treasury yields edged above 2.4% and commodities advanced.
“Global markets have calmed down after yesterday’s bloodbath,” Win Thin, the New York-based global head of currency strategy at Brown Brothers Harriman, wrote in a note.
Adding to the sense of normalcy, the offshore yuan stabilized after a six-day decline against the greenback that appeared to send it hurtling toward the psychologically significant 7-per-dollar level, partly thanks to a stronger-than-anticipated fixing by the Chinese central bank. The pair traded at 6.9026, slightly stronger on the day.
Asset managers steeled themselves for this risk-off episode in early May, according to Bank of America Merrill Lynch, with a record share of survey respondents indicating they had bought protection against a sharp decline in equities. At the same time, investors are “not positioned for a trade deal breakdown,’’ writes chief investment strategist Michael Hartnett. And while the trade war is judged to be the chief tail risk, fund managers are less scared by this prospect than they were in July.
Investors are also betting on the return of their “foul-weather friend’’ -- the idea that Federal Reserve policy makers would act to ease financial conditions if the market bloodbath got too extreme, according to Peter Tchir, head of macro strategy at Academy Securities.
“While fair-weather friends run at the first sign of trouble, expectations are for the Fed to step up and support markets,’’ he said. “The market is getting ahead of itself in terms of how quickly or aggressively the Fed will act in regards to a trade war, but it is a calming influence.’’
Federal funds futures imply that the central bank will deliver a 25 basis point cut by year end, with another reduction fully priced in for 2020.
Central bank support and growing familiarity with tariffs are “containing trade risks,’’ agreed Evercore ISI head of portfolio strategy Dennis DeBusschere. “A spiraling trade war would raise input costs and test the ability of companies increase prices, but the recent tariff increases are not an automatic margin killer.’’
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