Authored by Michael Zezas, Chief Public Policy strategist at Morgan Stanley:
Investors are obsessed, trying to figure out what happens next in the US/China trade dispute. Will the US call China? What do the negotiators really think? Does this last three weeks or three months? Our answer: you could be starting with the wrong questions.
First, let’s look back. It all seemed to be going so well. After market sell-offs sent signals to the US and China about the costs of trade tensions, they sat down at the G20 in November, called a truce, and appeared close enough to a deal to start planning for a signing ceremony. Then came the week of May 5. The US claimed China had moved the goalposts on key issues and announced another tariff increase, with preparations to levy tariffs on another ~US$300 billion of imports. China responded with counter-tariffs and heated rhetoric. Escalation was back, but the market response was relatively muted. After a 3-4% down move in the S&P from all-time highs and about a 7% down move in the Shanghai Composite, both indices remain well above pre-G20 levels. This suggests the recognition of heightened uncertainty, but no clear idea of what comes next.
