Wall Street Responds To The US-China Ceasefire

As discussed previously, while the kneejerk reaction to the Trump-Xi ceasefire is that global markets will likely be positive, even as a formal trade deal remains elusive as ever, a more detailed take could lead to problems as now the Fed will feel far less pressure to ease in July, and since in June stocks exploded higher on hopes that Powell will cut rates as much as 50bps next month, a positive reversal in US-China relations could prevent Powell from capitulating and leave the Fed on hold, an outcome which would lead to a sharp risk off phase.

Does Wall Street agree with this assessment? Here, courtesy of Bloomberg, is how markets will likely react when they open on Monday, according to strategists and investors:

Mansoor Mohi-uddin, senior macro strategist at NatWest Markets in Singapore:

  • “Investor sentiment is set to be buoyed in the week ahead by a truce in the U.S.-China trade war.”
  • Financial markets are unlikely to significantly reduce their expectations for Federal Reserve rate cuts despite global trade tensions easing. Thus risk assets -- stocks, commodities and emerging markets -- are set to rally while the safe-haven dollar, yen and Swiss franc underperform.”

Stephen Innes, managing partner at Vanguard Markets in Bangkok:

  • The “reset button” being hit on trade talks was the markets’ base-case scenario, and this is supportive for risk, but the lack of a timeline for progress may cap “bullish topside ambitions.”
  • “With no news reading algorithms to steamroll the markets on Saturday, traders will have a 36-hour cooling off period to quantify their next move. And I would expect the markets to be very orderly on Monday open.”
  • The extensive lists of demands from both sides may be “a bridge too far.”
  • “Underlying sentiment remains quite bearish in terms of the medium-term outlook for a U.S.-China trade deal as well the global growth outlook.”

Chris Weston, head of research at Pepperstone Financial in Melbourne:

  • “I can’t see this meeting doing risk assets any harm, but there is still a lot of work to do to convince central banks they don’t need to act to keep the economic expansion in check.”
  • “A few weak shorts may look to close out on Monday” given the tariff reprieve, prospects for negotiations to restart and that both sides “actually appear more united than expected.”
  • Watch Sunday’s China PMI data.

Alfonso Esparza, senior market analyst at Oanda in Toronto:

  • “Everybody played their part without any additional drama and until more details emerge we are back at square one.”
  • “Oil is positioned to rise after the positive trade news.”
  • “Gold will be pressured as trade optimism reduces the appeal of the yellow metal as a safe haven.”

Jean-Charles Sambor, deputy of head of emerging-market fixed income at BNP Paribas Asset Management in London:

  • “This is of course good. Investors have been generally negative on both the probability of a meeting and the probability of a positive outcome following this meeting.”
  • “High-yield spreads should do well. China high yield remains very cheap especially, and emerging-market currencies should continue to rally on the news.”

Banny Lam, head of research at CEB International Investment in Hong Kong:

  • The outcome is “exactly” what the market had expected so the impact will be neutral.
  • “I would say the G-20 summit delayed the escalation in trade tension, rather than solved the problem.”
  • The U.S. and China will probably want to reach a deal soon amid pressures on their economies, but it will be “very difficult.”

Source: Bloomberg