The U.S. stock market has been riding high over the past six weeks, fueled by optimism that the United States and China are nearing an interim trade deal. Beyond the obvious – that an interim deal is no deal at all – there are growing signs that the two superpowers may never bridge the gap on core issues like intellectual property, industrial policy and the burgeoning trade gap.
Now, analysts at Morgan Stanley are warning that a “phase one” trade deal may be “as good as it gets.”
In an interview with CNBC, Morgan Stanley analyst Andrew Sheets threw cold water on speculation that the U.S. and China are making progress towards a comprehensive trade deal – or that they will ever do so under the Trump administration.
Our base case is that the phase one trade deal gets done and that might be about as good as it gets, that phase two and phase three remain distant next year.
We do think the phase one deal, that there’s enough agreement there, that the bar is low enough, that there’s been broad agreement around a lot of those issues for some time that it can get done.
President Trump first introduced the idea of a “phase one” trade deal back on Oct. 11. At the time, the deal to freeze tariffs in exchange for larger agricultural purchases seemed like a done deal. But after more than six weeks of negotiations, no agreement has been produced. As Reuters recently reported, the highly anticipated agreement may have to wait until next year as negotiators fight over tariff rollbacks.
Wall Street and global stocks have already priced in the phase one resolution, as evidenced by the record-setting gains of the past month. Andrew Sheets told CNBC that the risk of a stock-market selloff is high if the deal isn’t delivered.
It may be a while before investors realize that a preliminary deal doesn’t really break the impasse between Washington and Beijing. The Trump administration will struggle to convince China to overhaul its industrial policy or limit its encroachment on American intellectual property.
If the words of a former China trade official are anything to go by, Beijing is hoping Trump gets re-elected in 2020 because the president is “easy to read.”
An extended tariff war will eventually impact U.S. stocks, which are showing signs of overvaluation, according to JP Morgan. Activity in the U.S. bond markets suggests investors are already bracing for a correction. Although the yield curve has steepened in recent months, the 10-year U.S. Treasury yield is back below 1.80% and correcting lower again.