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The right US-China deal may make investors hope that 'globalization hasn't ended'

Key Points
  • Stock markets could move higher if China and the U.S. complete a trade deal and agree to drop additional tariffs that were implemented last year, said Christopher Wood, global equity strategist at CLSA.
  • But, if no deal is reached between the two economic giants, markets could go back to where they were on Christmas Eve when the S&P 500 entered a bear market, Wood said.
President Donald Trump (L) shakes hand with China's President Xi Jinping at the end of a press conference at the Great Hall of the People in Beijing on November 9, 2017.
Fred Dufour | AFP | Getty Images

Stock markets globally have to some extent recovered from a sell-off last December and could move higher if a "positive surprise" comes out of the trade deal between China and the U.S., according to financial services company CLSA.

"I think there's room for further rally if there's a positive surprise on the deal. What's the positive surprise? It's that they drop the existing tariffs," Christopher Wood, global equity strategist at CLSA, told CNBC's Sri Jegarajah on Thursday.

Wood was referring to the additional tariffs that China and the U.S. imposed on each other's products last year when tensions between the two economic giants were escalating. Washington slapped new levies on $250 billion worth of Chinese imports, while Beijing did the same on $110 billion in American goods.

U.S. President Donald Trump and Chinese President Xi Jinping agreed in December to not implement further tariffs while representatives from both sides work to negotiate a deal.

The two countries reaching an agreement and dropping the additional tariffs imposed last year would lead investors "to think that maybe globalization hasn't ended," which would boost sentiment and spur a rally in markets, according to Wood. But that rally would be short-lived if investors began to worry that the U.S. Federal Reserve could raise interest rates again, he said.

China is trying to avoid 'aggressive stimulus': CLSA

The strategist said he's not expecting the Fed to raise interest rates at all this year.

"I think in the context that we have a successful trade deal, the tariffs are dropped, and the U.S. (economic) data remain basically okay, there is a potential — short term — for monetary tightening expectations to come back ... and halt the rally," said Wood.

"If I'm completely wrong and there's no trade deal, tariffs go back up then we go back in the markets to where we were on Christmas Eve and then we're talking about Fed easing," he added.

U.S. stocks had their worst Christmas Eve performance ever in December after the slipped into a bear market and the Dow Jones Industrial Average fell below 22,000 points. The turmoil on Wall Street spilled over to stock markets worldwide, with Germany's DAX, China's Shanghai Composite and Japan's Nikkei also entering bear market levels in December.