Double down on stimulus amidst potential trade war armistice.

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It seems two key equities markets are currently factoring in two key expectations:

  • US markets - expect a trade deal and a dovish Federal Reserve; and

  • China markets - expect a Government stimulus trickle-down effect plus a quadruple weighting of China A-shares in the MSCI emerging markets index.

Basically, this means rocket fuel for equities and bonds.

But what of a trade war armistice? Will Donald Trump relinquish his favored blunt instrument for a ‘good’ deal or just ‘a’ deal?

The lack of detail doesn’t fill me with confidence that it will be a great deal (if there is one at all), but then again we may know more this month with a ‘signing ceremony’ scheduled for 27 March, assuming it goes ahead.

Interestingly though, if there is a workable deal and Tariffs make way for a return to free trade, then it might be reasonable to assume an economic growth scenario.

As the US is likely to be the main recipient of this, there’s potential for higher US inflation and an overheating economy, and in turn the Fed having to step in and adjust interest rates.

If that happens, do we end up back where we were in December 2018 when the Federal Reserve was contemplating 3 to 4 rate hikes in 2019?

We all know what happens to bond and equities markets when the next move in interests rates is expected to be up.

Regards, Mike


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