This year’s G20 summit in Buenos Aires is shaping up to be a key event for the markets. More specifically, the dinner between Presidents Trump and Xi is what matters. With a backdrop of rising trade tensions and with further tariffs being touted, all eyes are on whether Donald Trump and Xi Jinping can make a breakthrough on the contentious issue of trade.
Leading up to the summit, which begins on Friday, there have been conflicting signals on an almost daily basis.
On the one hand, President Trump was clear that he believed that trade tariffs on $200 billion worth of Chinese goods would be increased to 25% in January, up from the current 10%. The sentiment was supported by Vice President Pence.
A day later, White House advisor Larry Kudlow expressed his optimism at a trade deal being reached. We see the conflicting messages coming from the White House as both a negotiating tactic and simply divided opinions. The result is that market expectations are quite low.
Possible outcomes are skewed positively for markets
Market consensus is for a middle-of-the-road meeting with nothing especially achieved. While this could result in disappointment and a market sell-off, we think the low expectations make this less likely. It’s quite plausible that the market could rise simply because the G20 has been and gone without any big hiccup. The two leaders don’t have to commit to anything tangible to improve the mood music.
The best-case scenario would be for the two powers to agree to postpone the increase in trade tariffs. More so if the two leaders agree a deal can eventually be done. We are more optimistic than the market consensus and see a postponement in tariffs as a likely outcome. It is more a matter of timing than policy. The market may be underestimating Trump’s desire to keep good personal relations with Xi. Trump will also wish to characterise the meeting as a success. If Xi brings something ‘sellable’ to the table, perhaps on intellectual property, Trump gains nothing from confirming tariffs on China at or soon after the G20. It can always be announced later.
At the other end of the spectrum, the worst- case scenario would be a complete breakdown in dialogue between the two sides. Communication between the US and China, at varying levels, has been more or less continuous since the US first applied trade tariffs. A complete breakdown in talks would fuel fears over slower growth in China and thus slower global growth.
Under the consensus and or best-case scenarios, we would expect sentiment to improve and demand for riskier assets to increase i.e. US stocks would rally and the dollar, which has benefited from trade tension uncertainty, would pull back.
Web of influencing factors
Trade tensions are just part of an increasingly tangled web of factors that have contributed to the dominant negative sentiment of late. It’s easy to put the blame squarely on the brewing trade war; it contributed to global growth concerns and fanned fears over a slowdown in China, potentially hitting future demand for oil. However, the fact is that deleveraging in China meant cracks were showing in the economy well before trade tensions escalated.
Furthermore, concerns over the Fed’s hiking cycle were on show as early as February. Thursday’s rebound in US indices and drop in US Treasury yields reflects the easing of interest rate-centred concerns. The more ‘dovish’ comments from Fed Chair Jay Powell were a game-changer. The backdrop of a dovish Fed is another bit of support for a positive reaction to the G20 and a Santa rally in markets.
Disclaimer: The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please note that 79 % of our retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing money.