Global Stocks Could See 10% Trade Discount Narrow on Deal

(Bloomberg) -- Global stocks are currently trading at a 10 percent discount thanks to the trade war -- a gap which could eventually close if reports the U.S. and China are close to a deal are accurate.

Strategists at UBS Group AG including Yianos Kontopoulos isolated the impact of equity moves on “trade shock” days to show the MSCI AC World Index has been hit by almost 10 percentage points since the dispute started. European stocks have been most hit with the Stoxx 600 Index showing a near 13 percentage point impact, and Australian stocks the least with just a 0.4 percent hit.

“On our estimates, equities are still pricing relatively large trade discounts,” the strategists wrote. “The probability of a near-term resolution is rising, and even if our model somewhat overstates the discount priced into equities, room remains for equities to rise on a further reduction in tensions.”

The U.S. and China are close to a trade deal that could lift most or all U.S. tariffs as long as Beijing follows through on pledges ranging from better protecting intellectual-property rights to buying a significant amount of American products, according to people familiar. One of the remaining sticking points is whether the tariffs would be lifted immediately or over a period of time to allow the U.S. to monitor whether China is meeting its obligations, they said.

Bank of America strategists said in a note last month U.S. stocks could hit a new record high should a “real deal” with China be struck, while JPMorgan Chase & Co. strategists led by Marko Kolanovic estimated in June that market reactions to trade headlines had yanked $1.25 trillion in value from American shares.

Here Are the S&P 500 Bull Cases That Get Help From a Trade Pact

Still, not everyone is as bullish. A trade deal between the U.S. and China will put an end to the rally in risk assets that's been in place since late December, said Hondius Capital Management LP's Shawn Matthews in a Bloomberg TV interview in February.

--With assistance from Adam Haigh.

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Andreea Papuc, Joanna Ossinger

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