Morgan Stanley: 'Phase one' US-China trade deal might be 'as good as it gets'

An anticipated "phase one" trade deal between the U.S. and China will likely be inked, but the subsequent stages "remain distant," according to one strategist at Morgan Stanley.

"Our base case is that the phase one trade deal gets done and that might be about as good as it gets, that phase two and phase three remain distant next year," Andrew Sheets, chief cross-asset strategist at Morgan Stanley, told CNBC at the Morgan Stanley APAC Summit on Thursday.

Sheets' comments come amid growing concerns over the state of trade negotiations between the U.S. and China, which have been embroiled in a protracted trade war for more than a year now. The trade dispute between the world's two largest economies has weighed on financial markets and the global economic outlook.

Reuters reported Thursday, citing trade experts and people close to the White House, that a "phase one" trade deal between the two economic powerhouses may be delayed into next year. That news came after The Wall Street Journal reported that the ongoing trade talks could hit an impasse.

... expectations for that phase one have become quite high and so that obviously increases the risk that if it's not delivered, markets will be disappointed by that.

Andrew Sheets

Morgan Stanley

Meanwhile, investors are keeping a close watch on Dec. 15 — when additional tariffs on Chinese goods to the U.S. are set to kick in.

"We do think the phase one deal, that there's enough agreement there, that the bar is low enough, that there's been broad agreement around a lot of those issues for some time that it can get done," Sheets said.

Still, he acknowledged: "This is a huge assumption for the market."

"I think as markets have rallied over the last month, expectations for that phase one have become quite high and so that obviously increases the risk that if it's not delivered, markets will be disappointed by that," Sheets said.

Markets stateside have soared to record highs in recent weeks amid earlier optimism over U.S.-China trade talks, since U.S. President Donald Trump announced in October that Washington and Beijing have reached a partial trade deal that has since remained elusive.

— CNBC's Fred Imbert contributed to this report.

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