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Tariff truce likely to give markets a reprieve, but just a temporary one

By Lilian Karunungan and Abhishek Vishnoi

A trade truce bet..

By Lilian Karunungan and Abhishek Vishnoi

A trade truce between the worlds biggest economies will probably fuel a relief rally across risky assets, albeit a short-lived one.

Strategists and investors from Toronto to Singapore agree the outcome of a high-stakes meeting between U.S. President Donald Trump and his Chinese counterpart, Xi Jinping, alleviates the immediate risk of more tariffs in a dispute that has gripped investors for more than a year. They also worry that core issues of the trade war havent been resolved.

“While on the surface the G20 outcome appears positive and poised to give risk assets a short-term boost, the agreement did not by itself signal any major breakthrough in resolving the fundamental trade conflict,” Patrick Wacker, a fund manager for emerging-markets fixed income at UOB Asset Management in Singapore. “We are likely to see a similar pattern following the G20 in Buenos Aires: a truce followed by further escalation.”

Its a concern echoed by International Monetary Fund Managing Director Christine Lagarde, who warned that unresolved issues between the U.S. and China on trade pose serious risks to the future of global economies, which are already going through a “rough patch.”

Still, a return to the negotiating table ends a six-week stalemate that had raised fears the two nations were headed into a cold war. Trump told reporters he wouldnt put new duties on China for the “time being” after Xis administration agreed to buy a “tremendous” amount of agricultural products. For analysts, the biggest breakthrough was the decision to allow Huawei Technologies Co. to buy some products from U.S. suppliers after the Commerce Department last month blacklisted the company for national security reasons.

Despite global trade tensions easing, “financial markets are unlikely to significantly reduce their expectations for Federal Reserve rate cuts,” said Mansoor Mohi-uddin, a senior macro strategist at NatWest Markets in Singapore. “Thus risk assets — stocks, commodities and emerging markets — are set to rally while the safe-haven dollar, yen and Swiss franc underperform.”

Currencies in developed markets may also rebound, especially those with exposure to China, according to Valentin Marinov, the head of G-10 currency research at Credit Agricole. The Australian and New Zealand dollars, the Japanese yen and the euro may rise, he said. And even though the outcome of the meeting between Trump and Xi was largely expected, there could be a rebound in carry-trade optimism, with long dollar versus the euro and Swiss franc as the best picks, he added.

Meanwhile, Khiem Do, the head of Great China investments and global markets at Barings in Hong Kong, said a 50-basis-point interest rate reduction in the U.S. is unlikely, because the truce is going to dominate sentiment toward trade talks in the short term. St. Louis Federal Reserve President James Bullard on Tuesday said a cut of that magnitude would be “overdone.”

Below are more comments from investors and strategists:

Credit Agricoles Marinov in London:

The implication is that further easing of U.S. conditions stemming from stock-market optimism following the G-20 summit “should reduce the need for imminent Fed rate cut in July.” This makes the upcoming U.S. payrolls and ISM data “very important” to the near-term rates outlook.

Nader Naeimi, the head of dynamic markets at AMP Capital in Sydney:

Overall, plenty of ritual, positive empty language, no tariffs rolled back, and no resolution time frame. So, no clearing of the air for global corporations (where to produce, invest, hire or source), and leaves the US-China economic issues unresolved.
The truce in May 2018 lasted just 10 days, he said

Naeimi is taking the following actions for his fund: Hes closing long-duration in U.S. bonds; adding to U.S. curve steepener positions; closing defensive bond proxy positions — utilities in particular — in favor of cyclicals such as securities in the energy, materials and energy industries; adding longs in emerging-market currencies; shifting from emerging-market bonds to stocks.

Olivier dAssier, the head of applied research for Asia-Pacific at Axioma in Singapore:

“These guys didnt really give investors much to go on”

“We might see some short-covering from a few overzealous hedge funds, but overall, sentiment was neutral and nothing in this outcome is likely to give investors the confidence they need to raise their risk appetite.”

Kerry Craig, global market strategist at JPMorgan Asset Management in Melbourne:

“The lifting of ban on the sale of technology to Chinese companies was a step beyond expectations and the market reaction come Monday will likely be positive

“Markets are likely to breathe a collective sigh of relief given the highly anticipated outcome of the meeting. However, the reprieve may be short lived and there is still no guarantee that a deal can be reached or even that any deal would completely address all of the differences that have driven investor anxieties, particularly when it comes to technology and the enforcement of a possible deal”

Hao Hong, a strategist at Bocom International in Hong Kong:

“While most expected that both sides will calm down to agree to further discussion,” lifting ban on Huawei is a surprise.
“Lifting the ban for now shows progress in the negotiation and sincerity to discuss further”

“It would appear that the ban on Huawei is really more about the trade disputes than national security.”

Masanari Takada, a strategist at Nomura Securities Co in Tokyo:

“We retain our risk-on view ahead of the July market and expect global equity and 10-year U.S. Treasury yields to rebound through end-July”

“We keep our strategy even after G20; bullish in July but bearish in August.”

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”

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