ANZ explains why Trump and Xi's trade-war deal may see emerging markets rally into year-end

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  • A temporary trade truce has been agreed between the United States and China, and risk assets such as stocks, commodities and emerging market currencies are rallying.
  • Many are now asking whether the move reflects a true breakthrough in trade negotiations, or simply short-covering in previously beaten down asset classes.
  • ANZ Bank says the trade truce is more akin to “kicking the can down the road rather than as a major step forward”. However, it says that may still be enough to prompt further buying in risk assets in December, especially in emerging markets.

The United States and China have agreed to a temporary trade truce, resulting in a spectacular rally in stocks, commodities and emerging market currencies on Monday.

But will it last?

Unsurprisingly, those markets that were beaten up the most from trade tensions were among those that rallied the most, hinting that opportunistic buying, particularly with market positioning short, helped to fuel the gains seen on Monday.

Of note, many markets also closed well off their opening highs, suggesting that some investors believe the trade truce is merely “kicking the can down the road,” rather than the start of a longer-lasting solution, when it comes to trade negotiations.

Daniel Been, Head of FX Research at ANZ Bank, is one who remains cautious about what the future holds when it comes to trade tensions.

“The result does little to change our concerns about how 2019 plays out. We see this more as kicking the can down the road rather than as a major step forward,” he says in relation to the temporary trade truce.

“Ultimately, it remains a high order for China to fulfil the US’s demands on structural issues, and at a time when the major issues that the US has raised represent a challenge to China’s rise, a long lasting and meaningful de-escalation remains very challenging.”

However, while Been says this is likely a case of can-kicking 101, treading the path taken by policymakers so often in the past whenever a stalemate forms, he thinks it may just be enough to see risk assets come home with a wet sail as we approach the final throngs of 2018.

“Timeframes are important,” Been says.

“For the remainder of 2018, it is likely that there is enough alignment between the two statements for issues surrounding trade to fall into the background and for the corrective bounce to extend.

“This is particularly the case when the news is combined with the tone from the Federal Reserve Chair and the Vice Chair last week. They suggested that the Fed is set to become more data contingent and cautious.

“Together, these events mean that two of the market’s biggest concerns are suddenly looking slightly less insurmountable.”

And with investor risk appetite currently sitting around average levels, according to ANZ’s Global Market Sentiment Index, seen below, Been says this points to the probability that “risk appetite moves higher, particularly in emerging markets”.

ANZ Bank

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