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Stock-market bulls celebrating a partial U.S.-China trade pact don’t argue that the yet-to-be-signed agreement erases all the worries around the long-running conflict between the world’s two largest economies. But they are banking on the idea that the dynamic has flipped from escalation to de-escalation.
“We may have reached the point of ‘peak tariffs’ and this deal could be the start of a series of phased rollbacks,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a Monday note. “This could unlock further upside for equity markets, driven by an improvement in business confidence and a recovery in investment.”
All three major stock-market indexes hit all-time highs on Monday. The S&P 500 SPX, +0.87% was up 0.8% at 3,195.45, while the Dow Jones Industrial Average DJIA, +0.61% gained around 183 points, or 0.7%, to trade at 28,318. The Nasdaq Composite COMP, +1.08% rose 1.1% to 8,827.
Skeptics, however, contend that the potential for renewed conflict as well as uncertainty over what exactly was agreed on in the phase-one deal will limit the upside available for global equities.
A rally by European stocks on Monday appeared to be driven more by last week’s U.K. election than the U.S.-China trade pact, said Oliver Jones, economist at Capital Economics, in a note. And Asian equities saw a mixed performance, with indexes that have usually been most sensitive to trade issues, including Japan’s Nikkei 225 NIK, -0.29% and Hong Kong’s Hang Seng Index HSI, -0.65% falling on Monday.
Rollbacks of U.S. tariffs on Chinese imports amount to less than had been previously suggested in news reports, Jones noted, while questions remain over whether targeted agricultural purchases that U.S. officials say China has agreed to are achievable.
“More generally, we think that the deal marks the start of the next stage of the trade war, not an end to the conflict,” Jones said.
For bulls, the crucial catalyst may be the fact that tariffs are being reduced rather than raised — marking the first de-escalation of levies.
Haefele said UBS Global Wealth Management was boosting risk exposure in its global tactical asset allocation, adding an overweight in emerging-market equities and closing out an underweight allocation in the Australian dollar AUDUSD, +0.2182% versus the U.S. dollar.
Within its equity portfolios, the asset manager also prefers U.S. and Chinese equity markets alongside its overweight position in emerging-market stocks and maintains its preference for U.S. equities over the eurozone, Haefele said.
“While the eurozone could benefit from a bounce in cyclical markets, increased purchases of U.S. goods by China could come at the expense of other exporters,” he said. “We also prefer stocks in Japan versus the eurozone, as the former has priced in less of an economic recovery.”
