Goldman Sachs sees no trade deal before 2020 U.S. election, now expects three rate cuts

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LONDON (Reuters) - Goldman Sachs said it no longer expects the United States and China to agree on a deal to end their prolonged trade dispute before the November 2020 presidential election as policymakers from the world’s largest economies are “taking a harder line”.

The bank now expects two back-to-back rate cuts from the U.S. Federal Reserve (Fed) “in light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit”.

The comment on U.S.-China trade and a revision to Fed expectations came after U.S. President Donald Trump said last week he would impose a 10% tariff on $300 billion of Chinese imports from Sept. 1, further aggravating trade tensions with Beijing.

The move by Washington “suggests that both sides in the trade conflict are taking a harder line, reducing the odds of a resolution in the near term,” Goldman Sachs chief economist Jan Hatzius wrote in a note.

Hatzius said expects the new set of tariffs to remain in place on election day in November.

Global equities have lost nearly $2.5 trillion on the tough rhetoric from both the United States and China. On Monday, China let the yuan slide in response to the latest U.S. tariffs.

Hatzius sees a 75% chance of a rate cut by the Fed in September and a 50% chance in October, following the reduction last week. He had previously only expected two cuts this year.

“The Fed has been increasingly responsive this year to trade war threats, bond market expectations, and global growth concerns,” Hatzius added.

Reporting by Thyagaraju Adinarayan; editing by Josephine Mason and Angus MacSwan