The worst case scenario of further trade escalation has been averted. The G20 meeting over the weekend resumed the negotiations between China and US on trade, after the tariffs increase in May on$200bn of Chinese products, and the consequent Chinese retaliation,which both put financial markets under pressure and increased downside risk to the economic outlook.
The worst case scenario of an extension of tariffs on the remaining approximately $300bln of imports from China, which would have seriously damaged the global economy, has been averted in the short term.
Some concessions have been made on both sides: from the US to ease the Huawei ban (US companies will be again allowed to sell their equipment to the Chinese company), and from China to step up the import of US agricultural goods.
A “grace” period. The US economy has not been immune to the consequence of global trade deterioration (weak manufacturingPMI, 51.7 in June vs 56.6 at the beginning of the year, and weak investment). President Trump’s will to avoid afurther weakening of US economic conditions (and investors’ sentiment) will allow the market to buy some time on trade disputes, before this topic comes back in focus via the harsher tones of the next US presidential electoral campaign.Market relief, not a rally for risk assets. As we expected, there was some market relief after the G20 meeting rather than a strong rally, as some progress in the trade disputes were somehow already priced in and the expectations for a full deal are still very low, especially with the tech supremacy issue increasingly taking the centre stage. The focus will be back on economic data, which continue to show some weakness, and Central Banks, where expectations for accommodative measures are high, maybe too high with some risk of disappointment.Emerging Markets and European equities the relative winners of trade truce. Although a scenario of resumed negotiations does not substantially change our overall cautious risk assessment, we believe that both EM assets and European equities could benefit in relative terms from the post G20 relief.
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