‘Cling to hope’
“Investors seemingly continue to try to cling to hope that policymakers on both sides opt to deescalate,” Deutsche Bank’s research strategist Jim Reid said in a note Friday.
Reid noted that President Donald Trump told reporters Thursday that a “deal is still possible,” and that he had received a “beautiful letter” from Chinese President Xi Jinping.
Global stock markets have seen heavy selling this week as the tension between Washington and Beijing escalated. The Dow Jones Industrial Average has fallen more than 650 points this week, while the S&P 500 has lost about 2.5%. Global equities have seen outflows of $20.5 billion in the past week, according to new research by Bank of America Merrill Lynch said on Friday.
Already priced in?
The recovery could also be due to markets already pricing in the tariff hike. The announcement on the increase initially came from Trump on Sunday, giving investors plenty of time to position assets in their portfolios. In addition to that, a number of analysts have also pointed out that the increase in tariffs from 10% to 25% will only really take effect in a few weeks and hence markets are anticipating a deal will come before that.
Goldman Sachs told clients in a note that there is still some wiggle room in the negotiations, which are still set to continue on Friday.
“We note that details in the notice implementing the tariff hike indicate that exports that have already left Chinese ports before May 10 will not be subject to the increase,” said Goldman economist Jan Hatzius.
“This creates an unofficial window, potentially lasting a couple of weeks, in which negotiations can continue and generates a ‘soft’ deadline to reach a deal … This also leaves an opportunity for the two sides to reach an agreement in the next couple of weeks, though challenges remain,” he added.
Russ Mould, an investment director at London-based stockbroker AJ Bell, said the market moves could be down to investors now having real facts with the formal tariff hike, which would dispel any speculation earlier in the week.
He also explained that a China retaliation will hurt U.S. businesses and consumers and have a negative impact on the economy. He added that the finger of blame would then point to Trump for being “too aggressive,” noting that he cannot afford to let this happen ahead of elections next year.
“Investors could be betting that China’s retaliation could force Trump to back down and come to an amicable conclusion,” Mould said in his note.