Markets are in a turmoil as the world's two largest economies are moving further away from returning to the table to deescalate the trade war and as US manufacturing shrunk for the first time in three years.
The drop in the ISM purchasing managers index to 49.1 in August is the first concrete sign that the trade war is hurting US manufacturers and that only seems to have hardened US President Donald Trump's stance against China as he tweeted that a deal after he gets re-elected (and that's a big assumption) would be harsher.
This doesn't bode well for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index with the futures market pointing to a 0.6% drop at the open.
Growth stocks exposed to US economy are likely to take the brunt of the negative sentiment. These include the Brambles Limited (ASX: BXB) share price and Afterpay Touch Group Ltd (ASX: APT) share price – just to name a few.
Is it time to be a contrarian investor?
But this could be the best time to bet on a trade deal outcome, according to Bank of America strategist David Woo who was interviewed on Bloomberg.
Talk about a contrarian trade! Woo said he is "reasonably optimistic" as he thinks the pressure is on for Trump to strike a deal in the near-term to avoid sending the US into an economic downturn ahead of the November 2020 election.
Time is running out for the incumbent president if you believe the bond market. The inverted yield curve, which have reliably signaled a recession in the US, indicates that its economy is likely to go into reverse around election time.
There has only been one time in the past 50 years that a recession had coincided with the presidential election, according to Woo. This shows how far US commander-in-chiefs will go to avoid one.
In case you are wondering, the lone unfortunate president that had to face voters amid a recession was Jimmy Carter, and he lost.
The Aussie could be a top performer
We probably wouldn't need the US and China to kiss and make up either to trigger a surge in risk assets, such as shares. Any signs that they are working together to ease trade tensions will be enough given that global markets haven't priced in any of this potential positive outcome.
But it isn't only equities that are set to bounce sharply. Woo believes the Australian dollar is likely to be one of the best performing assets on the back of easing tensions as the Aussie battler has been hammered over the past several months due to our reliance on the Chinese economy.
Conversely, the rally in bonds that have depressed yields (price and yield move in opposite directions) would be over. This could mean borrowers won't be able to enjoy record low interest rates for that much longer.
That's not a bad trade-off for the return of economic growth.
