Partial Trade Deal Optimism Is Growing Ahead of U.S.-China Talks

(Bloomberg) --

Optimism is growing that Chinese and U.S. negotiators resuming talks today can reach a partial deal, though traders are bracing themselves for market volatility.

The MSCI index of emerging currencies added 0.1% as of 10:05 a.m. in London after Bloomberg reported that next week’s tariff hike could be suspended and the New York Times said that President Donald Trump could let some U.S. companies supply Huawei Technologies Co. A measure tracking developing-nation stocks gained 0.1% after Asian assets whipsawed amid concern that talks scheduled for Thursday and Friday in Washington might be cut short.

Here are what investors and analysts are saying on the current state of play:

Todd Jablonski, chief investment officer at Principal Global Investors LLC in Seattle:

• Both sides have incentives to make some kind of partial deal, which may include a pact on China buying more U.S. products and the U.S. suspending upcoming tariff hikes
• These actions would support risk assets, particularly Asia/EM equities and currencies. However, the chances of a full trade deal before 2020 elections are very low and volatility is going to stay in the market

Damien Loh, chief investment officer at Ensemble Capital Pte in Singapore:

• The proposed U.S.-China currency pact could be a “realistic compromise” on both sides given that the People’s Bank of China Governor Yi Gang is in Washington as well, so technical details could be hashed out
• China has no reason to devalue its currency if no more tariffs are enacted, so they would be amenable to such a deal
• USD/CNY could go lower if a rollback of tariffs occurs, but this is unlikely; a halt on new tariffs could see USD/CNY around 7.0-7.05
• The current back-and-forth headlines just demonstrate the fluid situation and there is very little conviction in myself or in the market on a deal

Stefan Hofer, chief investment strategist at LGT Bank in Hong Kong:

• There is a “decent chance” of a partial deal, which is kind of like the equivalent of a ceasefire. China buys more U.S. agricultural products and they’ll talk about more difficult things later
• This is a long process. This could last for years, well into the potential second term of Donald Trump, maybe even after that
• The currency pact is quite “symbolic in nature” and the U.S. criticism about the currency being “artificially undervalued” will probably go away. What you will see is a “gentle, further slow depreciation of the yuan.” LGT predicts the yuan will reach 7.2 per dollar in six months and 7.3 in 12 months versus the current spot rate of 7.115

Rajeev De Mello, chief investment officer at Bank of Singapore Ltd.

• We expect a modest deal which focuses on easy deliverables such as agriculture and most recent tariffs and announcements
• Both sides would probably favor getting an agreement which resolves their short-term objectives, but they would want to show that they came out with strong wins

Sebastien Galy, macro strategist at Nordea Investment Funds SA in Luxembourg:

• The eventual deal is one on agriculture and manufacturing. This topic of forced technology transfers won’t disappear
• The idea of a currency agreement is one that goes so far to the core of policy making in China that it is deeply unlikely to be anything more than a “fig leaf”
• Both the U.S. and Chinese have seen that tariffs were initially fully priced through into the U.S., though it is a temporary effect, while the growth effect is a permanent one. We assume Chinese growth is currently 4.2% and would drop to 3.4% next year, roughly the impact calculated by the IMF

Ryuta Taketomi, client manager at Resona Bank Ltd.’s market trading office in Osaka:

• There is still anticipation for the U.S. and China to clinch a partial trade agreement and the dollar-yen pair can climb to around 108.50 should that happen

Robert Carnell, chief economist for Asia Pacific at ING Groep NV in Singapore, writes in a note:

• The “prize” for some sort of trade deal between the U.S. and China will be to avoid the implementation of further tariffs, due on Oct. 15 and Dec. 15
• A “nothing-achieved” outcome from today’s talks would return markets to a risk-off mode fairly quickly
• USD/CNY will potentially push up as U.S. Treasury yields drop and possibly fall below the Sept. lows

Hironori Sannami, an emerging-market currency trader at Mizuho Bank Ltd. in Tokyo:

• Markets will seesaw on the varying media reports and moves may not last long
• A report that the U.S. is weighing a currency pact may have helped turn risk sentiment positive to some extent because it spurred some speculation that it could lead to a postponement of additional tariffs
• The fact of the matter is that nothing concrete is out, so currencies won’t move beyond their recent range for now

Jun Kato, chief market analyst at Shinkin Asset Management in Tokyo:

• Bits and pieces of information suggesting progress or compromise in U.S.-China trade talks may be positive psychologically, but markets won’t be moved in a major way until there is clarity on tariffs
• “Market focus is solely on whether the Oct. 15 tariff deadline is in place as scheduled or postponed, and any other bits and pieces of news won’t alter market direction”

--With assistance from Yumi Teso, Chikako Mogi, Chikafumi Hodo, Kartik Goyal and Joanna Ossinger.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Karl Lester M. Yap

©2019 Bloomberg L.P.