U.S.-China trade talks could falter, and drag stocks lower

Javier E. David
·Editor focused on markets and the economy
Updated

There’s a growing possibility that the U.S. and China may not resolve their wide-ranging trade dispute. And markets don’t seem prepared for it.

On Thursday, the three major benchmarks flatlined as stocks weighed news that President Donald Trump and Chinese President Xi Jinping may delay a planned summit until April at the earliest.

With the global economy slowing, Wall Street analysts hope that cooler heads will prevail, prompting a detente in the trade war.

“A near-term trade deal between the U.S. and China now appears likely —indeed, it is our main scenario,” Luigi Speranza, BNP Paribas’s chief global economist, wrote in the firm’s global outlook released this week.

However, the relatively muted reaction to the summit’s postponement — and the sizable gains the Dow (^DJI), S&P 500 ^GSPC) and Nasdaq (^IXIC) have added on the heels of each favorable development in the U.S.-China trade saga —suggest asset markets are priced for a resolution, instead of the downdraft that may result from a failure of the talks.

In fact, there’s a very real chance the president could walk away from the bargaining table. Just weeks ago, Trump did exactly that during a high-stakes denuclearization summit in Vietnam with North Korean leader Kim-Jong Un, and hinted recently at doing the same with Xi.

“There [are] all sorts of concerns about trade flows, supply chains and how business gets done in America,” Dave Donabedian, the CIO of CIBC Private Wealth Management, told Yahoo Finance recently. He added that investors were “too complacent” about a Sino-American deal.

‘I don’t know when something’s going to happen’

There’s no doubt that Trump — with his trade agenda imperiled by partisan politics and his own penchant for protectionism and unpredictability — badly needs a deal with China. In a frank discussion with the “Freakonomics” podcast, former White House economic advisor and ex-Goldman Sachs executive Gary Cohn said that Trump was desperate for a win.

"The only big open issue right now that he could claim as a big win that he'd hope would have a big impact on the stock market would be a Chinese resolution,” Cohn told the podcast. “Getting the trade deficit down I will never say is easy, but of the issues on the table, that's relatively easier."

In Senate testimony this week, U.S. Trade Representative Robert Lighthizer was noncommittal about when a deal would take place, or if it would at all.

"I don't know when something's going to happen. Something's either going to have a good result or we're going to have a bad result before too long but I'm not setting a specific timeframe,” he told lawmakers.

Despite numerous false starts in the tortured path to a bilateral trade agreement between the world’s two largest economies, the market has priced in an eventual resolution.

However, given China’s recalcitrance and the administration’s constant hedging, at least a few observers think investors appear overly-sanguine about the U.S. and China striking a deal that will roll back tariffs and resolves outstanding trade issues.

Some of the rosy optimism has been stoked repeatedly by the Trump administration. On Thursday, Fox Business Network’s Charlie Gasparino reported on Thursday that the White House is predicting a “significant stock market pop” after a deal is announced.

However, the yawning U.S.-China bilateral trade deficit is a problem economists have described as a “made in America” phenomenon that’s all but impossible to address using tariffs. Globally, America’s trade imbalance skyrocketed to its highest in a decade last year, while its gap with China rose by nearly 12%, to nearly $419 billion.

The import duties the U.S. recently slapped on Chinese imports have become proxies for a broader dispute between the two parties that’s spanned decades. In fact, their differences are a complex tableau of nearly intractable disputes over exports, intellectual property rights and technology sharing that have bedeviled several American presidents.

All the more reason why economists think investors should be more skeptical about a clean resolution. But as of this week, virtually all economy watchers continued to bank on a deal.

“We expect the current tariff truce extension to yield a partial resolution, including select US tariff rollbacks in exchange for some Chinese concessions on imports, market access and intellectual property,” Dean Turner, an economist at UBS Global Wealth Management, wrote in a research note to clients this week.

“We retain our modest overweight position on global equities, and continue to prefer offshore Chinese equities in our Asia portfolios,” he added.

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Javier David is an editor for Yahoo Finance. Read more:

Follow Javier on Twitter: @TeflonGeek