Citigroup has a China trade deal strategy for all the possible outcomes from the trade negotiations between Washington and Beijing.
Sectors in the crosshairs — including technology and industrials — could see the widest stock swings depending on the success of the talks, according to the report published Tuesday. While China has already started to repurchase U.S. agricultural goods and promised to protect intellectual property rules, Citigroup global economist Cesar Rojas believes any lasting outcome is far from certain.
"The U.S. and China are still not ready for a deal, and while trade talks are scheduled to resume with high-level U.S. officials visiting China on February 14–15, the U.S. continues to set the stage for a China-containment strategy," Rojas wrote. "After President Trump noted that no deal would be announced without him meeting with President Xi, the recognition that such [a] meeting is highly unlikely to happen before the March 1 deadline increased the uncertainty around a potential escalation of trade tensions."
Rojas then laid out three separate cases for the trade talks and how each could impact the market and the varying sectors.
Citi's bull case is characterized by a "comprehensive" trade deal with a mutual tariff rollback and a softer U.S. stance toward China. This case would include measures to reduce the trade deficit (e.g., sustained Chinese purchase of U.S. soybeans) and commitments by Beijing to safeguard intellectual property and open its markets to American investment.
The bull scenario "should be positive for markets as trade tensions between the two largest economies fade, and there should be a large boost to sentiment," Rojas wrote. "Citi strategists believe this positive scenario would have a limited overall impact, aside from benefiting industries that have been in the crosshairs thus far, as credit markets have largely discounted the risk of a breakdown in negotiations."