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Stocks need to drop at least 10% before Trump changes harsh trade tone: Raymond James

Key Points
  • Raymond James' Ed Mills says equities would have to experience a correction of at least 10% "before Trump starts talking up the prospects of a G20-timed deal."
  • Trump and his Chinese counterpart, Xi Jinping, are expected to meet at next month's G-20 summit.
  • "While there is some hope for continued talks, longer-term expectations are being downgraded on the ability to strike a meaningful deal unless political calculations see a significant directional change over the next couple months," Mills says.
  • The S&P 500 is down more than 4% during this trade war sell-off.
President Donald Trump speaks at an event honoring the Wounded Warrior Project Soldier Ride in the East Room of the White House in Washington, DC on April 18, 2019.
Mandel Ngan | AFP | Getty Images

Stocks are going to have to fall a lot more before President Donald Trump eases off his tough rhetoric on U.S.-China trade, said Ed Mills, Washington policy analyst at Raymond James.

Mills wrote in a note to clients Tuesday that equities would have to experience a correction of at least 10% "before Trump starts talking up the prospects of a G20-timed deal." Trump and his Chinese counterpart, Xi Jinping, are expected to meet at next month's G-20 summit.

"In the meantime, we expect threats of escalation by both sides in an effort to build negotiating leverage ahead of the G20 meetings," Mills said. "While there is some hope for continued talks, longer-term expectations are being downgraded on the ability to strike a meaningful deal unless political calculations see a significant directional change over the next couple months."

Trade tensions between China and the U.S. reemerged last week after Trump hiked tariffs on $200 billion worth of Chinese imports. The president also raised the possibility of slapping tariffs on an additional $325 billion worth of Chinese products.

Stocks have fallen sharply since Trump first threatened to raise levies on Chinese goods on May 5. The and Dow Jones Industrial Average are both down more than 4% in that time period while the Nasdaq Composite has shed 6.3%.

Trump's move led China to retaliate by announcing higher tariffs on $60 billion worth of U.S. products on Monday. Those tariffs, China said, will take effect on June 1. That announcement sent the Dow and S&P 500 to their worst daily performance since Jan. 3, while the Nasdaq logged in its biggest one-day loss since December.

Trump doubled down on his tough stance on Tuesday. In a series of tweets, he said the U.S. is "in a much better position now than any deal we could have made," adding that "billions of dollars" are coming back to the U.S., "where they belong."

"We are likely to see a renewed period of volatility spurred by negative headlines and market reactions after the latest rounds of tariff escalation by the U.S. and China," Mills says.

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Morgan Stanley: More tariffs will lead to a US recession

Key Points
  • Morgan Stanley's Michael Wilson tells clients that companies will have a tough time offsetting the cost of any new or higher tariffs, which could tip the U.S. economy into a recession.
  • "With trade resolution now looking like a 'show me' story for US corporates and the market, lack of resolution will be a material potential drag on earnings growth that will be harder to mitigate than the market expects as other costs rise in tandem," Wilson says.