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#1 11-06-2019 16:10:29

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US stock market: 3 scenarios regarding US-China agreement, Fed rates

US stock market: 3 scenarios regarding US-China agreement
and Fed rate decrease hypotheses

Wall Street investors are enjoying a multi-day rally, with the Dow Jones Industrial Average preparing for its 6th positive session.

However, Citigroup analysts believe that imminent trade tensions, linked to the import duties sought by the Trump administration, still make a bear market possible if no favourable solution is found.

"Trade tensions seem to be intensifying in a way that raises concerns, or at least increased caution", wrote Mark Schofield and Benjamin Nabarro of Citi in a report issued yesterday.

The strategists argue that a summer break for the US Congress makes political uncertainty a persistent threat to the markets - on that is considered risky in the short term.

Schofield and Nabarro argue that the most likely outcome of international trade wars is an increase in tensions rather than a decrease in trade animosities, and the US is in the middle of it all.

This includes the possibility that the United States may increase import duties, at least temporarily, on all Chinese imports as part of a "shock and scare" strategy.

"We believe that President Trump will probably continue to hold a stiff position", analysts said.

This could help equities in a bear market, which is usually defined as a decline of at least 20% from a recent peak.

Trade disputes have weighed heavily on the world's economies, and such disagreements could potentially weaken economic production.

It is with this in mind that Citi analysts are considering the following 3 scenarios for the market as tariff negotiations progress ahead of this month's G-20 meeting:

G-20 Trade Agreement

- Equities are soaring in emerging markets as the global economic outlook improves, the S&P 500 Index rises to around 2900.
- The 10-year treasury bill yield is approximately 2.5%.
- Gold is trading at around $1,300 per ounce
- The US dollar moves slightly lower, and remains capped by lower expectations of a decline in Fed rates

No trade agreement, no Fed rate cut

- Stocks are entering a "large-scale bear market". The S&P 500 drops to 2,350 - 10-year treasury bill yields are at 1.5% or below
- Gold climbs to $1,600
- The US dollar rises against most rival currencies

No trade agreement, but the Fed reduces rates by 3/4 of a percentage point

- Stocks reach new heights, but this does not concern all types of stocks or all sectors.
- 10-year treasury bills trade in a range from 1.75% to 2%.
- Gold rises to $1,500
- The US dollar falls

"Anything worth having is worth going for - all the way." - J.R. Ewing



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