Spotlight: U.S. markets surging, but escalating trade tensions could erase gains

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"The Fed can basically keep the economy idling right like it is. It will be a very low growth rate economy with Fed stimulus," Blank said.

WASHINGTON, June 12 (Xinhua) -- U.S. markets saw their best week this year, and investors are hoping the rally continues. Experts said, however, the big "if" is the trade frictions with China.

There is no question that a trade deal would lead to a strong market rally, Lachman said, since the threat of an all-out U.S.-China trade war would have been defused.

by Matthew Rusling

Market speculation is rife over whether the Fed will move to cut interest rates, either sooner or later, which would spark a market surge.

The drop followed China's announcement that Beijing would raise tariffs on around 1000 billion U.S. dollars' worth of American products, in retaliation against Washington's tariff hikes on Chinese goods.

Last month U.S. markets saw a major sell-off in response to the trade tensions with China, after Beijing retaliated against recent U.S. tariffs with tariffs of its own.

On May 10, the United States increased additional tariffs on 1000 billion U.S. dollars' worth of Chinese goods from 10 percent to 25 percent, and has threatened to raise tariffs on some 1000 billion dollars' worth of Chinese imports yet to be hit.

The sell-off caused the U.S. Dow Jones Industrial Average to plummet over 10000 points. All three of the major U.S. stock indices plunged by at least 2.3 percent, and the NASDAQ slid 3.4 percent.

"If there's more incendiary rhetoric from both sides, that means nothing to the market and it will be hard to know what the market will do," Blank said, highlighting U.S. markets' uncertainty.

"Easy money often fuels stock market rallies even though the underlying global economy might not do well," Lachman said.

The market floundered in May -- the worst month of May for traders in years -- and was zapped back to life earlier this month when Federal Reserve Chairman Jerome Powell signaled that the Fed would lower interest rates to offset any damage done by trade wars. With the market up again, the U.S. Dow Jones Industrial Average closed Wednesday just over 25,000.

"These risks might temper the strength of any rally," Lachman said.

Some have argued that a deal with China could result in a 3,000-point increase in the U.S. Dow Jones Industrial Average, which would amount to a major gain for investors.

"However, it is important to note that there are still other major risks to the global economic recovery," Lachman said, noting the threat of a hard exit of Britain from the European Union. Other threats include an Italian budget crisis and geopolitical tensions with Iran.

If no solution is found, there's no telling what markets might do, and they could once again drop to lows seen last December, experts said. Much rests on a re-start of negotiations between the two sides.

Experts said more tariffs will cause goods production to take it on the chin in the United States regardless of what the Fed does. However, the Fed can stimulate, on the margin, a full employment service economy, which will probably leave it in the positive territory on a net basis.

The Fed's recent pronouncements indicated that there has been a "complete U-turn in monetary policy, with the markets now pricing in that the Fed will cut interest rates in July and will likely make another two rate cuts before the end of the year," Desmond Lachman, a resident fellow at the American Enterprise Institute, told Xinhua.

"If negotiations get underway, the market will pick up, because uncertainty will fall," Zacks Investment Research Chief Equity Strategist John Blank told Xinhua.

"The thing the market will really care about and will tank on is the announcements of tariffs, whether they are Mexican tariffs, Chinese tariffs, or Chinese retaliation," Blank said. "The market cares about tariffs, because tariffs really hit growth."

But experts said while the Fed can keep the economy from tanking, it won't be able to spark massive growth.