(Bloomberg) — While the consensus of investors and stock strategists remains that the U.S. and China will reach a deal that ends the escalation in trade restrictions between the world’s two largest economies, a vocal minority has been warning about woeful over-optimism.
One of those Cassandras has been James McCormick, global head of strategy at NatWest Markets in London, who’s been monitoring markets for the better part of three decades. He says he’s heard two main objections to his warning about markets failing to discount a prolonged U.S.-China trade war.
“I had plenty of debates on this in the past few weeks, some a little heated,” McCormick wrote in a note Monday. “The pushback I get on the need for more discounting in global equities, the U.S. especially, boils down to the Trump and Powell ‘puts.”’
The first refers to the idea that President Donald Trump will come to the market’s rescue with a trade deal if needed, given the importance he places on equity performance as a yardstick for his administration. The second is the concept of Federal Reserve Chairman Jerome Powell coming to the rescue with interest-rate cuts.
A critical problem with both of the “put” arguments is their circularity, McCormick highlights. In other words, before Trump or Powell come to the rescue, there needs to be a big sell-off — the kind of sell-off that McCormick’s been warning about.
Another challenge is that it’s too soon to be making decisions based on the 2020 presidential campaign. For his own part, Trump hasn’t indicated any urgency about getting an agreement in coming months. On Monday, he said in Tokyo that “we’re not ready to make a deal” and that tariffs could go up “very substantially.”
As for the Powell put, “the Fed was far apart from the market on the possibility of a rate cut at its last meeting,” McCormick said. Suggestions of preparedness for the 2019 reduction that futures markets are discounting have so far been limited to regional Fed officials.
“The problem with the Powell put is that this Fed has a somewhat erratic reaction function. The longer it takes for the Fed to start squawking dovishly, the more vulnerable risk assets are likely to be,” McCormick’s Natwest colleague John Briggs wrote in a separate note.
While global stocks have slumped the past three weeks, the retreat has been far milder than the fourth-quarter rout. The next hurdle will be whether the Trump administration proceeds with slapping tariffs on the remainder of Chinese goods imports, according to McCormick. And that should be clear by the end of June, he wrote — after the conclusion of the G-20 summit in Osaka, where Trump and President Xi Jinping have the chance to set things back on track.
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