One look at the stock market shows the U.S.-China trade war, at least from the perspective of investors, isn’t going very well.
So what would bring it to an end?
Credit Suisse’s global equity strategy team authored a note arguing there are two alternatives that would drive a settlement.
One is a 10% pullback in the S&P 500 stock index. The other is clearer signs on who Trump’s Democratic opponent will be.
“We are concerned that, in order for a settlement to arrive, we would need two catalysts: first, Trump needs to have a clearer vision of which Democratic candidate he will face and thus a settlement is unlikely to be forthcoming until at least 2020 or second, the stock market falls (and probably a fall of 10% or more is needed to prompt a settlement),” they told clients.
The S&P 500 SPX, -0.68% has dropped over 1% since the publication of the research note, so there’s movement on the first end. Vice President Joe Biden has done better in opinion polls of late, but until the first Democratic party primary election it’s too early to lock him as a rival.
That’s not to say a cease fire could occur, such as the U.S. postponing the imposition of 10% tariffs on $300 billion of Chinese goods.
As for China’s response, the country already is suspending purchases of U.S. agricultural products, which “arguably has a bigger impact on Trump’s popularity in those key agrarian states” than tariffs on the $50 billion of U.S. imports that have yet to be targeted, the Credit Suisse team says.
Chinese consumers might respond by buying fewer products from big American companies like Nike NKE, +0.38% , Starbucks SBUX, +0.19% and Apple AAPL, -0.04% — which is what happened to Korean products after a missile dispute.
China can also take measures to shore up its economy. A mix of currency depreciation, credit growth, and real estate and infrastructure investment could form Chinese stimulus, but they don’t expect a big sell-off in the renminbi USDCNY, +0.4782% .
Historically, Credit Suisse says, China has offset about 85% to 100% of the impact of tariffs — to do so again, including the new 10% tariffs, the dollar would have to appreciate to 7.30 yuan.
Description of U.S. tariffs
Actual RMB at date
25% on $50 billion of goods
25% on $50 billion + 10% on $200 billion
25% on $50 bln + 25% on $200 billion
25% on $250 bln + 10% on $300 billion
The brokerage advised buying stocks on weakness, though they also pointed to political risks across the globe, in the U.K. with no-deal Brexit a possibility, in India with Kashmir losing its special status and in Hong Kong. Long-term warning signals include the yield curve’s implying of a 33% chance of a recession, the sharp decline in profits as measured in U.S. GDP accounts, and that free cash flow has fallen below buybacks and dividends, which has occurred ahead of market peaks.
But they “struggle to see this being the start of a bear market” and say with a trade settlement or clear ceasefire, the market would stabilize again.
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