AGF Management Ltd CEO believes people should be prepared for just one of these outcomes to be fulfilled
Investors are facing an imminent dilemma – do they want a trade deal or further cuts from the US Federal Reserve?
By getting a trade deal, there’s a very good chance that the Fed stops decreasing interest rates, especially if prospects for the global economy begin to improve from having secured a lasting truce. Expectations of further cuts have already begun to wane now that the US and China are back at the table and prospects of an agreement have brightened.
However, if talks hit more snags, affecting global growth and ushering in an even greater threat of recession, the Fed might continue lowering its key lending rate in the weeks to come.
According to Kevin McCreadie, chief executive officer and chief investment officer at AGF Management Ltd, investors should be prepared for just one of these outcomes to be fulfilled, begging the question, which is more preferable, a trade deal or more rate cuts?
He explained: “Clearly, the former would be beneficial to markets, which have been whipsawed repeatedly from the acrimonious negotiations between the world’s two biggest economies over the past year and a half.
“This would be especially true if striking a deal meant an end to the hundreds of billions of dollars in tit-for tat tariffs enacted over this time and which are now threatening to take a more serious bite out of global growth.
“Less clear, however, is the impact that lower rates would have on markets and the economy. While more cuts might soothe investors who have grown anxious about the prospect of equities continuing their bull run without more stimulus, there is also the very real possibility that lowering U.S. rates to zero or into negative territory, may do more harm than good in an economic environment which is already awash in over US$17-trillion dollar in negative rate debt, according to Bloomberg data. After all, banks make money collecting interest on the money they lend, not by paying others to borrow it.
“None of this is to say that a trade deal is inevitable and, therefore, rate cuts unnecessary. If anything, the U.S. and China remain miles apart on reaching an agreement and it could take several more months for them to bridge the gap. But given the choice, investors would be better off getting the former, than they would be getting the latter.”
