With US-China trade talks resuming in Washington, an economist has forecast that the negotiations will lay a path for a better deal later in 2019 and provide positive market sentiment.
In a note to clients, Andreas Johnson, US economist at Nordic bank SEB, said both the US and China have strong incentives to avoid tariff escalation.
“President Donald Trump is afraid of negative stock market reactions and wants to reach an agreement, which can be presented as a ‘win’ in the presidential election campaign. China is eager to prevent an increase in US import tariffs from hurting exports, thereby worsening the slowdown in Chinese economic growth.”
The path of least resistance is for the US and China to continue trade talks past the 1 March deadline, Johnson added.
“This is our main scenario and we assign a 70% probability. However, there is a substantial risk of a breakdown (30% probability) resulting in an increase in US import tariffs. Extending the talks will set the stage for a ‘deal’ later in 2019 although this will not solve the broader tensions between the US and China.”
An announcement to extend talks would likely result in a limited improvement to financial market sentiment, said the SEB expert.
“The impact on the yuan would be limited and the USD/CNY would trade around 6.70-6.80. However, markets would react stronger to a breakdown in the trade talks and tariff escalation. This could see the USD/CNY test 6.95 again. We should also expect a fairly sharp correction in US and Chinese equity markets. Tariff escalation would support the Fed’s ‘wait-and-see’ approach and put downward pressure on US yields,” Johnson concluded.
