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Stocks rebound from worst day of the year—here's what 4 experts are watching now

US-China trade tensions are on the rise—Four experts on what to watch
US-China trade tensions are on the rise—Four experts on what to watch

U.S. markets recovered from their worst day of the year, after China's central bank rejected the U.S. Treasury's classification of the country being a currency manipulator and stabilized the yuan.

The move provided some relief to the markets and eased tensions that a currency war between the world's two biggest economies was on the horizon.

While the news helped ease market concerns, experts are remaining cautious. Here's what four experts think comes next:

Ellen Hazen, portfolio manager at F.L. Putnam Investment Management, said the increased tensions may lead the Fed to take more action.

"There is certainly some chance that this most recent ratcheting up of tensions was in some part designed to respond to what you were saying earlier ... about the Fed responding to this trade war. But, the results are real. We've seen the slowing in the industrial economy here and in other places. And part of that is due to the uncertainty, and the slowdown from the trade rhetoric. So, I don't know if a 50 basis point cut, or even more than that is going to turn that industrial economy around."

Leland Miller, CEO of China Beige Book International, said if the Chinese government really starts manipulating its currency, it could lose control of the yuan.

"A lot of people look at this as just a trade war that stepped up a little bit over time. But what's actually happened, is the beginning of the trade war there was tariffs, and those tariffs were dealt with by the Chinese through back door subsidies, through currency depreciation, through other things. So, they were basically counteracted as much as possible. Where we're going now, is a place where they can't do this. And if they were trying to do that with the currency, not only would there be a major political reaction, but they could lose control. I think the fear over what the Chinese are doing right now, is not about breaking seven. It's that now that they're no longer restrained by seven, this could go anywhere. And once it starts, the Chinese themselves may not be able to stop the fall of the yuan along the way."

Dan Suzuki, portfolio strategist at Richard Bernstein Advisors, said fears of a currency war were "overblown," and actually thinks China is a good risk-reward bet.

"The market reading into it being a currency war was overdone. At most, you're going to get a currency schoolyard fight. I mean, it's like little moves. They have very little interest in massively devaluing their currency. What happens if they do that? You're going to see massive capital outflows and they don't want to see that either. So, I think that directional[ly], you know, if you just pull up the long-term chart for the Chinese yuan, it's been coming down for the last 10, 20, 30 years. You know, I don't think that this changes that story. … We've raised some cash, but we've been lowering consistently our U.S. equity exposure, and we've been moving abroad. So we had zero weight in Europe, as an example, last year. We've now neutralized that. We're in roughly equal weight. China, we actually think is a good risk-reward play, because just look at the actual underlying data. There's trade talks, and then the underlying data for China, is actually starting to improve, at least on a relative basis, relative to everywhere else in the world where it's getting worse on a daily basis. So, we think that China is probably a best risk-reward bet, given that no one wants to touch that with a ten-foot pole."

David Kostin, chief U.S. equity strategist at Goldman Sachs, is doubtful that there will be a U.S-China trade deal in the near future.

"So, what we're focusing on with clients right now, is a couple of strategies. The first is services compared with goods. So services providing companies, as opposed to goods producers—and that is an important dynamic. In fact, I was on this program a couple months ago talking about [this] as a strategy, and the reason for that is that the companies that are services providing are more domestically facing. They don't have as much exposure from a tariff point of view. They happen to have better growth in terms of earnings, and they trade roughly at the same valuation. So, if you think about some of those companies, Microsoft at the top of the list, Amazon, we've got Google, as examples. Another strategy would be companies that are more domestically facing in terms of the source of their revenue. So, some of the paywall processors. The likelihood of a trade deal has diminished. And we have a trade barometer, that is basically, inferred from what's happening in the performance of stocks that are Chinese that are selling to the United States, and then vice versa .. it's at 11 right now. To put in context, it was 75 in April. It's now 11. OK, the probability of a deal ... based on the equity market would be very, very, low."