October 1, 2018 / 2:14 PM / 15 days ago

ANALYST VIEW-In Trump win, Canada, U.S. deal saves NAFTA as trilateral pact

Oct 1 (Reuters) - The United States and Canada forged a last-gasp deal on Sunday to salvage NAFTA as a trilateral pact with Mexico, rescuing a three-country, $1.2 trillion open-trade zone that had been about to collapse after nearly a quarter century. STORY:

SHAUN OSBORNE, CHIEF FX STRATEGIST, SCOTIABANK, TORONTO

“Looking at the price action last week the Canadian dollar outperformed, so there may have been some inkling in the markets that with this sort of self-imposed deadline that we had at the end of September that we could get something or should get something, but we have run into a lot of those soft deadlines before and nothing of consequence has happened. I don’t know that anyone was overly convinced that we would get something necessarily this weekend but I think most people viewed a trade arrangement would be bound at some point.

“The good news is that the risk of bad news has been removed. I don’t think there’s anything here that really changes the medium term outlook for the Canadian dollar or the Canadian economy, it’s just removed an uncertainty.”

DAVID KELLY, CHIEF GLOBAL STRATEGIST, JPMORGAN FUNDS, NEW YORK:

“The most significant thing about this new deal is that they changed the name. Reading it, it really is tweaks to NAFTA, but at least some of them in a positive direction from the economic perspective. It really is very small changes to the underlying framework of North American trade, but that’s a positive. There’s only downside to a trade war. To the extent we avoided a trade war in this hemisphere at least that is a positive.

“The fact that having made a very big deal about Nafta during the elections but then agreed to a deal which only changes small parts of it does say something about the potential end game for trade talks with China. There is a limit to how much China will compromise in the end, a limit to how much we will need them to compromise in the end. After all the U.S. trade deficit is primarily caused by a too-high U.S. dollar and a big deficit.”

OLIVER PURSCHE, CEO OF BRUDERMAN BROTHERS IN NEW YORK:

“Obviously this is a positive step forward, it’s one more box to tick. Overall, markets and investors are very much focused on economic policy and the upcoming earnings season and ignoring everything coming out of Washington. But given that last week it was looking to be more of a Mexico-US deal as opposed to a trilateral deal, it’s a positive development. It shows investors that in spite of an unconventional approach, the President’s hard tactics seem to be working.”

MIKE LORIZIO, SENIOR FIXED INCOME TRADER AT MANULIFE ASSET MANAGEMENT IN NEW YORK:

“There is a pretty significant risk-on tone following the new NAFTA agreement.

“However, an eventual agreement was priced in, or at least a non-disaster scenario was priced in. The market was more focused on the risk of a trade war with China than any other area and the market has been positioned accordingly. And even with China, the market has discounted what impact any trade negotiations will have on the fundamentals of the U.S. economy.

“This is a positive, and you’ve seen risk assets respond, and you’ve seen Treasuries respond a bit, but U.S. fundamentals are so strong right now that the effects of these negotiations had already been priced in.

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES FOR CHARLES SCHWAB IN AUSTIN, TEXAS:

“Anything positive relating to trade has always buoyed the markets so it’s not surprising to see a bounce. Generally those things are relatively short lived but the economics in the market are very strong and really only the concerns about the trade issues have been holding the market back from moving higher.”

ALEC YOUNG, MANAGING DIRECTOR OF GLOBAL MARKETS RESEARCH, FTSE RUSSELL IN NEW YORK:

“Stocks are rallying on the back of a last-minute deal Sunday that allows Canada to join the revised NAFTA Trade deal agreed to by the US and Mexico in late August. Despite all the handwringing over trade, the bark is proving far worse than the bite for U.S. stocks.

“Although the trade outlook with China remains uncertain, overall trade uncertainty has been receding for months helping propel stocks to record highs. And even when it comes to China many investors are betting there’s room for a market friendly compromise after the U.S. midterm elections in early November when the Chinese will have an incentive to deal to avoid the 25 percent tariff rate that kicks in on $200 billion in Chinese exports on January 1, 2019. That rate is currently only 10 percent. International stocks have even more to gain from trade breakthroughs than their U.S. counterparts because they have been held back too far by trade worries due to their economies’ increased sensitivity to trade.”

MARKET REACTION: STOCKS: Stocks were ahead, with the S&P 500 up 0.7 percent in early trading.

FOREX: The Canadian dollar CAD=D4 strengthened to a four-month high against its U.S. counterpart. The U.S. dollar index was flat. (Americas Economics and Markets Desk; +1-646 223-6300)

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