A trade deal between the U.S. and China won’t be the panacea that financial markets might be hoping, said Neil Shearing, group chief economist at Capital Economics.
With a substantial amount of trade optimism already priced into stocks, a dearth of details on any extant trade pact, and a global growth slowdown swirling, reasons to remain cautious abound, the economist said.
On Monday, China’s Shanghai Composite Index
closed at its best level since June thanks to investor excitement over trade, while the major U.S. indexes, the Dow Jones Industrial
and S&P 500 index
are looking at year-to-date gains of at least 10%, despite Monday’s wobbles, according to FactSet data.
Moreover, Shearing said a trade agreement may not deliver an anticipated jolt to a global economy that has swooned outside of the U.S. He said “even if a deal between the U.S. and China on trade is ultimately agreed, we don’t expect that a trade truce will now provide a substantial shot in the arm to the global economy.”
Global trade expansion has already slowed over the past several months — not necessarily because of protectionist measures involving tariffs but because the global economic cycle is at a point of retreat. The chart below illustrates areas of weakness.
Capital Economics anticipates global growth retreating until 2021 due to country-specific factors that will be a drag on their respective regional economies.
The Wall Street Journal reported over the weekend that Beijing and Washington are inching closer to agreeing a trade resolution. A deal would likely include China importing more from the U.S., such as soy, oil, natural gas, wheat and corn. The U.S. would, meanwhile, likely roll back tariffs on Chinese goods and not threaten further import barriers.
Although a Sino-American trade deal might not stop the global economy from temporarily turning lower, it could help business investment in the short-term. Indicators for business investments have been pointing lower of late, which could be an indirect effect of the worries about an escalation of the trade dispute. With a deal in place, there could be a rebound.
Presently, details remain scarce and a trade deal materializing still isn’t guaranteed. Shearing cited the recent North Korea-U.S. summit in Hanoi, which ended abruptly without an agreement, as cause for temperance in the investment community.
“Moreover, the fact that the White House is apparently pushing for the inclusion of a clause that would reinstate higher tariffs in the event of China’s non-compliance means that uncertainty over trade may linger even if a deal is struck,” Shearing added.
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