Morgan Stanley says phase one deal unlikely to improve business confidence.
The Dow Jones may have overreacted as economists like Paul Krugman says U.S. really lost the trade war.
Even if a bigger deal happens, long-run costs could prevent an extended stock market run.
The Dow Jones Industrial Average (DJIA) is hovering at record highs following the agreement of a phase one deal. But, Morgan Stanley says that it is not enough to improve business confidence.
Nobel laureate Paul Krugman and FTSE Russell executive Alec Young among many others similarly believe that the phase one agreement in its current form is not enough to sustain the Dow rally.
Why strategists are not as positive on the deal
Throughout 2019, the markets have priced in the finalization of a phase one deal.
The only reason why the markets responded with extreme euphoria in the past week is because expectations dipped in the last quarter as the U.S. and China had a fallout.
As the Dow Jones and the global market stabilized, strategists started to re-evaluate the phase one deal. And upon re-examination, strategists have become less optimistic on the potential effect of the agreement.
According to Zerohedge, Morgan Stanley analysts said that the firm is unsure if the deal can be a driving factor behind a significant increase in business confidence.
The bank said:
Given the execution risks going forward and the lack of clarity on important details, we don’t yet have the conviction that this deal can be a catalyst to a meaningful uptick in business confidence.
The impact of the deal on business sentiment and productivity is crucial because that has been played out to the public as the deal’s most coveted benefit.
Trump lost the trade war says Krugman
Nobeal laureate Paul Krugman said over the weekend that U.S. President Donald Trump lost the trade war.
Krugman pointed out that the U.S. tried to bully China and the Chinese government held tough despite signs of economic decline. Ultimately, the entire situation has returned back to where both sides started.
Going in to the end of the year, Trump is going to be claiming victory in his trade war. The truth is that there are almost never winners in trade wars — but there are losers. And however Trump may try to spin this, he lost.
The economist also noted that export prices of China did not fall based on data from the Federal Reserve Bank of New York’s Liberty Street Economics report.
The data indicates that the U.S. consumers paid for the tariffs, which hurt the U.S. economy in spite of the momentum of the Dow Jones.
Even if a sustained deal happens, extended Dow run is not certain
The consensus on a phase one agreement between the U.S. and China could lay the foundations for a bigger deal.
However, Krugman explained that even if the U.S. secures a comprehensive deal, it will have big long-run costs and business uncertainty will remain.
Furthermore, even if we do get a sustained deal — which is still far from certain — the whole episode will have two big long-run costs. First, business uncertainty about capricious policy is here to stay.
Given that strategists are not so optimistic in the aftermath of the phase one deal, the Dow Jones is likely to be overreacting, even though it is considered to be a breakthrough.
Joseph Young @iamjosephyoung December 16, 2019 10:36 UTC