• The latest G20 demonstrates some temporary progress in the US/China relationship. An increase of tariff rates in January 2019 was put on hold and the possibility for an additional tranche of tariffs for the rest of US imports from China ($267bn) is also further delayed, at least. China has found the right entry point to give some concessions to the US on sensitive topics for President Trump.
• This is positive news for China, who can buy time to refine the implementation of policy actions to face the economic slowdown and to push for more reforms and measures to open up the economy.
• Our view: we believe that neither this scenario nor the worst case of no agreement was completely priced in the market, even though markets partially discounted a weak scenario, with some risk of deterioration of China/US relationship and China’s economic slowdown.
This, combined with a more dovish Fed, could support a relief rally in the short term.
• Looking at the medium term, some uncertainties and risks remain. This deal does not end the trade disputes. The mix of agricultural, energy and industrial disputes still in place is very important for Trump’s electorate and there is a risk that the trade war rhetoric will resurface during the next presidential campaign in the US, keeping market volatility high.
• In conclusion, we don’t see the G20 deal as a game changer, rather as a short-term achievement that could bring some relief to the markets through the year end.
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