(08 October 2019 ) DAILY MARKET BRIEF 2:A Game Plan For US-China Trade Talks - Market News - 8 October 2019


Our
base case is for only modest progress, and given the recent deterioration in economic data, we retain a tactical underweight position in
equities while awaiting the result, preferring carry strategies.

That
said, we will be watching events closely, and it is possible, if unlikely, that talks produce a grand bargain.

What
outcomes are possible?

Our
base case, to which we assign a 50% probability, is for only modest progress in this round of talks. Modest progress averts further
escalation while failing to resolve conflicts over intellectual property and subsidies. We assign a 35% probability to our downside
scenario, in which further escalation leads toward a US recession, and a 15% probability to our upside scenario of a comprehensive trade
deal.

1.
Talks break down:
 This would heighten the chances of further rounds of trade
retaliation. We consider this outcome unlikely, since it would increase the threat of a US recession ahead of the 2020 presidential
election.

2.
Negotiations continue:
 The US and China fail to reach a deal but announce that
talks will continue. With this outcome, we would expect the full set of tariff increases in the pipeline to come into effect. It would be a
setback for economic growth, but markets could take comfort if the US and China announce a date for a next round of talks.

3.
A truce is reinstated:
 China agrees to step up purchases of US agricultural goods
and grants improved market access to certain US industries. In return, the US agrees to postpone implementing the latest round of tariff
increases. This would be moderately positive for markets in the short term, but the ongoing uncertainty would continue to hamper business
investment.

4.
An interim deal is reached:
 Scheduled tariff increases are suspended indefinitely,
and the US could agree to roll back restrictions on Chinese technology firm Huawei. This would likely push markets higher.

5.
A grand bargain is struck:
 The US agrees to roll back existing tariffs on China in
return for agreement on an enforcement mechanism. While we assign only a 15% probability to this outcome, it remains possible. We have seen
signs that some of President Trump’s core supporters are losing patience with the trade war. This may encourage him to make bigger
concessions. This outcome is expected to spur a more marked upswing in stocks. It would also increase the economic impact of the Fed’s recent
rate cuts.

What
does this mean for investors?

Against
this uncertain backdrop, we have been cautious on stocks and economic data has worsened.

But
we acknowledge that markets could move higher through the week, particularly if a trade deal is reached. Investors looking to position for
this potential outcome in advance could consider adding call options on S&P 500, which are attractively priced at present, in our view.

Our
positioning farther out will partly depend on the result of the talks, and on the market’s reaction to them. The relative appeal of adding to
or reducing exposure to US stocks will depend on the outcome of the negotiations, the economic backdrop, the willingness and ability of
global policymakers to stem the slowdown, and where the market is trading.

By
UBS



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(08 October 2019 ) DAILY MARKET BRIEF 2:A Game Plan For US-China Trade Talks - Market News - 8 October 2019
(08 October 2019 ) DAILY MARKET BRIEF 2:A Game Plan For US-China Trade Talks - Market News - 8 October 2019
(08 October 2019 ) DAILY MARKET BRIEF 2:A Game Plan For US-China Trade Talks - Market News - 8 October 2019
(08 October 2019 ) DAILY MARKET BRIEF 2:A Game Plan For US-China Trade Talks - Market News - 8 October 2019
(08 October 2019 ) DAILY MARKET BRIEF 2:A Game Plan For US-China Trade Talks - Market News - 8 October 2019

(08 October 2019 ) DAILY MARKET BRIEF 2:A Game Plan For US-China Trade Talks - Market News - 8 October 2019

(08 October 2019 ) DAILY MARKET BRIEF 2:A Game Plan For US-China Trade Talks - Market News - 8 October 2019