SINGAPORE (Apr 2): Concerns about trade tensions seemed to ease early this week on news that China and US officials are negotiating ways to reduce trade imbalances. US Treasury Secretary Steven Mnuchin said in a media interview over the weekend that he was “cautiously hopeful” a deal would be reached allowing China to avoid tariffs on US$50 billion ($65.4 billion) in US exports. On March 26, the S&P 500 Index posted its biggest one-day gain since August 2015. The MSCI AC Asia Pacific Index gained 0.5%.

Investors should not break out the champagne just yet. There is more uncertainty ahead, which could mean continued risk aversion. It is not so much the threat of a trade war that has put the market in risk-off mode. Mark Haefele, global chief investment officer at UBS Wealth Management, points out that the Chinese goods worth US$50 billion that the US wants to tax represent just 2% of total US imports. “We think it’s important not to overstate the direct impact of these tariffs on the global economy or equity markets at this stage,” Haefele says in a global note.

What has been more worrying is the difficulty of predicting what happens next. “Markets are bad at pricing geopolitics and trade tensions,” says James Cheo, senior investment strategist at Bank of Singapore, in a report. “It is hard for markets to price and predict what China and the US would do. The uncertainty is whether the Chinese will retaliate further and how [US President Donald] Trump responds from there.”

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