Paul O’Connor, Head of the UK-based Multi-Asset Team, shares his views on the meeting between the US and China at the G20 Summit in Osaka and explains why the ceasefire does not necessarily mean an end to the trade war.
At face value, this weekend’s agreement between China and the US to resume trade negotiations after a six week stalemate is good news for the global economy and good news for risk assets. The key positives here are that no new tariffs were announced, Donald Trump reversed his earlier decision to blacklist Huawei and the path to a further de-escalation of trade hostilities has been re-opened.
The consensus expectation going into the G20 summit was that the two parties would find some way to kick the can down the road, where the trade talks were concerned. While that is largely what happened, the Huawei concession and the overall tone of the leaders’ comments were more constructive than many expected. Given the adversarial rhetoric from both sides during the run-up to the G20 and the fact that at one stage there were doubts about whether the meeting would actually take place, more adverse outcomes certainly looked possible pre-summit. A relief rally in equities and other risk assets seems justified.
Beyond the short-term response, we still see many reasons for retaining a cautious view on the strategic outlook for US-China economic relations. For one thing, the most recent developments revived memories of the last G20 in December and two other meetings between Trump and Xi in 2017. These saw the leaders forge constructive agreements when meeting face to face, only for progress to be overwhelmed by a renewal of hostilities a few months down the road. It is hard to rule out another repeat of this pattern of agreement followed by breakdown and then re-escalation.
No detail, no commitments
A broader concern for us is that, aside from the Huawei move, the two sides made little meaningful progress at the summit in tackling the key strategic issues of intellectual property rights and technology transfer. More generally, it could reasonably be argued that few real commitments were made at the summit on any topics. The post-summit statements were very light on detail and no timelines were given. Even Donald Trump’s decision to hold back from putting new tariffs on China was only offered “for the time being”.
Which way on Huawei?
On the Huawei front, it is far from clear how durable or broad Trump’s reprieve will be. The weekend media was filled with comments from US politicians from both sides of the house criticising Donald Trump’s decision to lift the ban. Senior Republican Senator Marco Rubio called the decision “a catastrophic mistake” and predicted that Congress would reinstate restrictions on Huawei. Larry Kudlow, director of the National Economic Council, said that Huawei was not being offered “a general amnesty” and that “national security issues will remain paramount”. It has been reported that Donald Trump will meet his advisers this week to decide how to proceed on this issue. The risks seem skewed towards the policy implementation here being less generous than the weekend’s headlines might have suggested.
Growth concerns linger
So, while we believe that there was enough good news in the weekend’s developments to support a relief rally in equities and other risk assets, we do not see enough here to propel a sustained upswing in risk appetite. It is good news that some of the more adverse potential summit outcomes have been avoided but no real progress has been made to resolve the key areas of strategic economic conflict between these two countries. This G20 meeting was no game-changer for China-US relations.
Enduring concerns about the outlook for global growth mean that financial markets are likely to remain highly sensitive to any further developments in the China-US negotiations. Trade-related uncertainty continues to overshadow the global manufacturing sector, where confidence remains low and capital expenditure intentions are subdued. Surveys of business confidence among Chinese and Japanese manufacturers released overnight provided further evidence of this cautious global theme. Attention now turns to the important ISM manufacturing survey and payroll data being released in the US later this week.