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Investors do not expect rapid, easy resolution on tariffs

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Markets recover ground after sharp tariff-fueled selloff

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Hopes high for increased clarity, but volatility fears

remain

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US-China talks set to continue in Geneva on Sunday

By Suzanne McGee

May 10 (Reuters) - Investors are hopeful that U.S.-China

trade talks this weekend will cool a trade war between the

world's two largest economies and dispel some of the uncertainty

clouding financial markets, though few expect a major

breakthrough just yet.

The highly anticipated meeting in Switzerland could mark one of

the biggest developments since U.S. President Donald Trump

launched sweeping tariffs on April 2, which threw the global

trade landscape into chaos and set off extreme market

volatility.

"This is the mother of all negotiations," said Alejo

Czerwonko, chief investment officer, Emerging Markets Americas,

at UBS.

"There are hundreds of billions of dollars of trade on the

line, a 145% tariff on Chinese exports that amounts to some sort

of de facto embargo and grievances that extend well beyond

trade."

As of 1810 GMT on Saturday, the U.S.-China trade talks in

Geneva had adjourned for the day and were set to continue on

Sunday, a source familiar with the discussions told Reuters.

Recently, investors have expressed optimism that the

worst-case trade scenarios would not come to pass, and pointed

to signs of de-escalation between the U.S. and China as a reason

behind a rebound in equities.

But despite comments by Trump ahead of the talks suggesting a

lower level of Chinese tariffs, and a trade deal announced on

Thursday between the U.S. and Britain, many market participants

said they were not expecting major breakthroughs this weekend.

Rather, they confined themselves to hoping that nothing goes

wrong when the two sides come face-to-face for the first formal

round of what may be protracted negotiations.

"We're still doubtful that direct U.S.-China negotiations

will lead to a 'grand compromise'," said Thierry Wizman, global

FX and rates strategist at Macquarie, in a note to clients.

IMMEDIATE PACT SEEN AS UNLIKELY

Both the U.S. and China may want, or even need, to reach a

deal, said Liqian Ren, director of Modern Alpha at WisdomTree

Asset Management. At this early stage, however, there seems to

be little incentive to do so rapidly, she added.

"Each still wants to see how the other side copes with

negative headwinds," Ren said.

"Right now, the market is maybe a little bit too optimistic

in terms of what China and the U.S. can achieve and how fast

events will move."

Trade tensions between the two nations escalated last month,

when the U.S. boosted tariffs on all Chinese imports to a

whopping 145%, and China then raised levies on U.S. imports to

125%.

On Friday, comments by Trump that an 80% tariff on Chinese goods

"seems right" - making his first suggestion of a specific

alternative to the 145% levies - created some hope of progress

toward resolving the dispute.

The benchmark S&P 500 stock index has already erased the

steep losses seen in the immediate aftermath of the tariffs

announcement on April 2, although businesses continue to warn

investors of their impact, and the uncertainty they create, in

earnings-related comments.

The S&P 500 remains down about 8% from its February all-time

high and roughly 4% for the year.

Amid the tariff chaos, weak consumer sentiment surveys and other

"soft data" have raised concerns about U.S. growth, although

most economic data has indicated resilience in the economy.

EYEING MARKET VOLATILITY

Volatility, meanwhile, remains. The Cboe Volatility Index

, the options-based measure of investor anxiety, hovered

around 22 late on Friday - well below its recent closing high of

52.33 in early April, but above its longer-term median of 17.6.

One of the factors curbing that volatility so far has been

the high cost of establishing short positions betting on future

market declines, said WisdomTree's Ren.

"When a single (social media post) from the president can

make the market move 10%, it becomes very costly" to establish

those positions, Ren said. Equities soared on April 9 after

Trump paused many of the heftiest tariffs for 90 days.

Still, markets were poised for more volatility ahead, said

Matt Gertken, head of geopolitical strategy at BCA, a

macroeconomic investment research firm.

Gertken said the firm's best advice was to "sell on

strength."

Any signs of progress in the initial discussions would be

welcome, and allow China to devote more energy to its domestic

economic problems, said Andrew Mattock, a portfolio manager at

Matthews Asia.

"To talk about any other scenario, you end up with a

lose-lose outcome," he warned.

TOUGHEST DEAL TO NEGOTIATE

Despite the relatively fast agreement with Britain, Claudio

Irigoyen, head of global economics research at BofA Securities,

cautioned that other deals would be harder to hammer out, with

China being the toughest.

"I can see trade deals coming with India, Japan and maybe

South Korea, down the road," he said. "China - this is the most

complicated and will be the last one to come," in part because

the geopolitical relationship is entangled with the trade ties.

Investors are concerned that negative scenarios have not

been factored into markets.

"If we come out of Geneva with people using incendiary

language and strong disagreements, I don't think that's priced

in," said Czerwonko of UBS.

The market would probably be content with only modest signs

of progress, several investors said.

"We don't need happy talk," said Gertken.