Trade Talk Flop Would Hurt Stocks More Than Mini-Deal Would Help
Trade Talk Flop Would Hurt Stocks More Than Mini-Deal Would Help
(Bloomberg) -- Traders can be forgiven for being glued to trade headlines because the stakes are so high. By one estimate, the S&P 500’s decline in the event of another breakdown in talks would be more than double its potential gain if the two sides reached some kind of truce.
The benchmark gauge may vault back to all-time highs, or a 3% gain from current levels, should trade discussions progress favorably, according to Chris Harvey, an equity strategist at Wells Fargo. On the the other hand, if tensions escalate and stocks follow past patterns, the index may fall 7% to 2,750, he said.
Investors just got a taste of the extreme reactions as stocks tumbled overnight amid fears of a breakdown in negotiations, only to rally back on Thursday morning as President Donald Trump confirmed talks will continue Friday. Caution prevails, with a mini deal expected, as the U.S. and China began two days of talks aimed at easing hostilities in their 18-month trade war.
“The trade discussion is just sucking oxygen from everything else at this moment,” George Mateyo, chief investment officer at Key Private Bank in Cleveland, said by phone. “This is going to be an on-going tug-of-war for a while. I don’t think either side is ready to capitulate just yet.”
Stocks today are trading around the same level where they were two years ago when Trump touched off conflicts with major trading partners, compounding an economic deceleration. This week’s talks with China are expected to lead to a détente, in which a planned Oct. 15 tariff hike will be put on “indefinite hold,” according to Don Straszheim, Evercore ISI’s head of China research, and Sarah Bianchi, the firm’s head of political analysis.
Investors will be disappointed if the current round of talks lead nowhere. Over the past two years, the market has sold off an average 9% in the three instances when Trump added or implemented new tariffs near market highs, according to data compiled by Wells Fargo.
The trade talks come as some technical forces are poised to exacerbate market moves in either direction. Options dealers who sold put contracts and had to sell shares to hedge as markets tumbled are now sitting with positions that will require them to reload if stocks turn higher. If the market falls, they’d be forced to sell.
Such “short gamma” exposure currently stands at $6.88 billion, or about 13th percentile since 2013, Nomura Securities estimated.
This “will keep us “chase-y” two ways,” said Charlie McElligott, a cross-asset strategist at Nomura. “The ‘to delay or not delay’ determination on this next tranche of tariffs from President Trump will almost single-handedly dictate the either of the two binary outcomes being priced-in.”
Investors have kept a defensive posture over the past year, shunning cyclical stocks in favor of low-volatility and dividend shares, partly because of trade uncertainties. Any de-escalation is likely to spur risk appetite, according to Harvey at Wells Fargo.
“Markets will reach new highs at the expense of the more defensive stocks,” he said. “Keep in mind a potential ‘pile on’ scenario, as a notable amount of investors are not positioned for the upside scramble.”
To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net
To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Richard Richtmyer, Dave Liedtka
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