Analysts somewhat divided on results of US-China trade talks

Last Saturday's meeting between the Presidents of China and the US played out roughly as expected, save for the positive suprise in the form of a partial reprieve for technology giant Huawei, but there was some division among analysts on either side of the Pond regarding what most likely lay ahead next.

For strategists at Bank of America-Merrill Lynch, financial markets were likely to view the results of that meeting as a "modest positive in the short-term", but tariffs from both sides remained in place and would continue to gnaw away at growth and the risk of a further round of 'tit-for-tat' tariffs was present, they said.

"The US still has a long to-do list on trade. We expect a deal with China later this summer, but it could take a large market correction to get there. The risk of another round of tit-for-tat tariffs remains elevated," BofA-ML said.

"We also expect tariffs on a growing list of products and countries in the coming quarters. In addition, if the dollar remains strong despite Fed cuts, we would not rule out FX intervention."

There was also the risk that policy easing by the Federal Reserve, which wanted to keep inflation higher, might encourage an even tougher stance on trade on the part of the US, they said.

"Finally our "no pain, no deal" framework points to a worrying feedback loop between the Fed and trade policy [...] The risk is that the 'Fed put' could encourage an even tougher stance on trade, which would trigger even more Fed accommodation, and so on. The end result would be a loss of Fed policy ammunition, with an economy that is still soft."

Holger Schmieding at Berenberg was of a somewhat different view, with the economist telling clients that a broad US-China trade deal remained far off, although there was "a good chance" that tensions between the two countries could be contained because "a US economy that remains sufficiently strong is Trump’s best bet for re-election."

Unlike BofA-ML, Schmieding also thought it possible that there was now a reduced chance that Washington would ratchet up tensions with the European Union.

However, given the lack of detail available, it might be that Beijing and Washington had different takes on what was in fact agreed, he said, adding that "Trump's previous behaviour suggests that we need to treat the news with some caution."

Analysts at Citi meanwhile believed a full trade deal between the US and China would "potentially" need to wait until 2020.

And although the current truce would last through the end of 2019, if talks failed then 10% US tariffs on $300.0bn-worth of Chinese goods would be "almost ready to go".

"A pause in US-China tensions allows the US to focus on the next targets (USMCA ratification, Mexican tariffs vs immigration, and the auto tariffs threat vs EU/Japan) while China could still become the focus going into the 2020 election."