By William Watts, MarketWatch
Hopes rise for another 'cease-fire' in trade war
Stock-market bulls might find their summer riding on what
happens when President Donald Trump and Chinese leader Xi Jinping
meet at the Group of 20 summit in Japan later this week.
Skeptics argue that investors, after spending May in a painful
reassessment of the U.S.-China trade fight, have become complacent
once again in the run-up to the gathering on expectations that the
leaders will be eager to at least tone down tensions.
If the gathering disappoints, investors are likely in for a
"rough July and August" as it finally becomes clear that the trade
fight is likely to drag on far longer and than they had
anticipated, said Sandy Villere, portfolio manager at New
Orleans-based Villere & Co., in an interview.
'Small blink'
Trump stoked expectations for the summit after tweeting on
Tuesday about a "very good telephone conversation"
(http://www.marketwatch.com/story/trump-today-president-sets-extended-meeting-with-xi-as-he-rebukes-draghi-over-possible-new-stimulus-2019-06-18)
with Xi and announcing plans for an "extended meeting" during the
G-20 summit in Osaka, which begins June 28. That was credited with
helping soothe fears over a protracted trade battle.
"We see Trump's phone call to Xi as a small blink in the trade
war," said Allan von Mehren, chief analyst at Danske Bank, in a
note. "It reveals that he is keen on meeting with Xi at the G-20,
which China had not confirmed before the call. We now see a higher
than 50% probability that the meeting will end with a cease-fire
and resumption of trade talks."
Stocks pulled back significantly in May after Trump accused
China of backtracking on commitments made earlier in talks, raised
existing tariffs on a range of goods and threatened to impose
levies on the remainder of Chinese imports. The U.S. also moved to
blacklist China's Huawei Technologies Co. by restricting access to
U.S. technology. Beijing has threatened retaliation. The impasse
has stoked fears of a spiraling trade fight that could pose a
significant danger to global growth and corporate earnings.
Stocks have bounced back in June, with the S&P 500 returning
to record territory last week and the Dow Jones Industrial Average
moving within hailing distance of its all-time closing high set in
October. The S&P 500 posted a 2.2% weekly rise, while the Dow
saw a 2.4% rise and the Nasdaq Composite advanced 1.8%.
Check out:How the stock market rally could spark a 'FOMO' rerun
for investors
(http://www.marketwatch.com/story/how-the-stock-market-rally-could-spark-a-fomo-rerun-2019-06-25)
Stocks were
(http://www.marketwatch.com/story/stock-index-futures-point-cautiously-higher-as-investors-await-g-20-meeting-2019-06-24)
(http://www.marketwatch.com/story/stock-index-futures-point-cautiously-higher-as-investors-await-g-20-meeting-2019-06-24)putting
in a subdued performance
(http://www.marketwatch.com/story/stock-index-futures-lower-ahead-of-fed-speakers-including-powell-2019-06-25)
(http://www.marketwatch.com/story/stock-index-futures-point-cautiously-higher-as-investors-await-g-20-meeting-2019-06-24)early
this week as investors appeared to shift into waiting mode.
Fed delivers
The Federal Reserve did its part. Investors took the policy
statement and remarks by Chairman Jerome Powell that followed the
central bank's policy meeting on Wednesday as a signal significant
rate cuts are in the offing before the end of the year -- a
prospect that's served to cheer stock-market bulls who appear
confident the central bank's efforts will ensure the expansion
continues.
The rally in stocks this month suggests Fed rate cuts are
already priced into the market, wrote UBS strategists Keith Parker
and Stuart Kaiser, in a Friday note. That leaves the outlook for
equities and other assets viewed as risky to be driven by
expectations for economic growth, "with the G-20 potentially
another key fulcrum."
"Within equities, stocks that benefit most from lower rates
(defensives, growth) are trading at a record 120% price-to-earnings
premium to stocks hurt most by lower rates (financials,
cyclicals)," Parker and Kaiser wrote. A neutral or positive outcome
to the G-20 meeting could narrow that "extreme premium" somewhat,
they said.
Feedback loops
And then there are the feedback loops between developments on
the trade front and the outlook for Fed policy. After all, Powell
has emphasized concerns about the impact of rising trade tensions,
which are seen as a reason for the Fed's turn toward potential
easing.
See:Why the path for stocks and other markets now depend
'critically on politics'
(http://www.marketwatch.com/story/stock-market-investors-discover-they-cant-ignore-politicians-anymore-2019-06-08)
Indeed, Ward McCarthy, chief financial economist at Jefferies,
sees a direct relationship.
"We think that favorable and compelling developments on trade at
the G-20 will obviate the need for the Fed to cut rates," he said,
in a Friday note. "Without a trade deal, we think that the Fed will
cut the fed-funds rate by 50 basis points."
Tough talks
While Danske Bank's von Mehren sees a better-than-even chance
the meeting will soothe tensions and jump-start talks, he warned
there are significant hurdles.
He said China will likely stand firm on its demands, including
its call for the U.S. roll back tariffs to pre-trade-war levels. Xi
may also condition new talks on a withdrawal of the export ban on
Huawei, which is a sharp attack on Chinese technology and seen as
an attempt to contain China, von Mehren said.
If Trump refuses to withdraw the export ban, China could
retaliate by placing U.S. companies on its "unreliable foreign
entities list," he said.
Of course, presidential tweets and other developments could go a
long way toward further shaping expectations for the meeting.
Villere, who manages the small- and midcap focused Villere Balanced
Fund , said he isn't sweating the outcome. Lamenting the difficulty
of finding reasonably priced companies at current levels, he said
some summer volatility would likely provide some "good
opportunities."
(END) Dow Jones Newswires
June 25, 2019 11:36 ET (15:36 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.