Morgan Stanley Skeptical of Trade Truce, Warns Investors to be Cautious

Morgan Stanley

Markets overall rallied on Monday following the G20 summit, with a number of positive developments when it comes to the international political and economic situation.

One good announcement was that President Donald Trump will be resuming trade talks with China, putting an end to the potential of further tariff hikes as the Eastern nation in the meantime agrees to purchase American farm products.

As a result, optimism in the markets jumped as previously surging assets, such as gold, fell in response to this boost in confidence. However, one investment bank is warning not to get too excited about the potential of a trade deal, and that investors could lose lots of money if one isn’t careful.

Morgan Stanley went on to warn that it’s investors that they should get overly excited about the prospect of a trade deal with the U.S. and China. While such an event would lead to a surge in the markets, it wouldn’t be enough to cover up what are fundamental weaknesses in both the domestic and global economies.

At the same time, a deal of any kind still remains far on the horizon with plenty of hurdles needed to be overcome before anything tangible can be resolved.

“A pause in rising trade tensions is not a fix for slowing U.S. economic activity and earnings pressure,” wrote Michael Wilson, an equity strategist at Morgan Stanley, in a Monday research note. “In November, a truce brought a short-lived rally to the S&P, but ultimately induced procurement managers to cancel orders as inventories were already high and there was no longer an incentive to stockpile ahead of incremental tariffs. The S&P 500 rose close to 1.5% on the Monday after the [November trade truce]. Sound familiar? Well, after that one-day pop on December 1, the S&P 500 then had its worst December on record.”

Analysts at other institutions agreed with Wilsons’ assessment. Aditya Bhave, an economic at Bank of America, agrees. In a note to clients, the analyst went on to say that they see several reasons for concern.

Even with the withdrawal of all tariffs, Chinese economic growth has been faltering amidst a manufacturing slowdown, which underlies a deeper problem within the nation that more stimulus programs from Beijing won’t solve anymore.

Analysts also are worried about a potential feedback loop between the Federal Reserve, which will attempt to support the economy and cut rates, alongside President Trump’s negotiating style that often involves re-escalating various trade conflicts, hurting the economy in the short run.

As interest rates fall and the stock market rises in response, Trump could take advantage of the surging markets to drive a harder bargain with the Chinese and other trade partners, acting in a position of strength.

Regardless of whether this will prove true, what does seem clear is that while a trade deal would benefit the economy greatly, in many ways it’s placing a band-aid to cover up an already existing injury. With signs of global economic growth falling and a potential recession looming on the horizon, a trade agreement would likely only forestall the inevitable.