Leaders of the 20 richest economies in the world met this weekend in Osaka for the G20 summit. Markets were poised and waiting to observe the outcome of the expected meeting between Presidents Trump and Xi, their first face to face encounter since the breakdown in talks in May. Wall Street economists and strategists were expecting an increased escalation in trade tensions which would have further derailed global growth prospects, currently weighed down by the on-going trade war.

US- China Ceasefire

The meeting between the two presidents did occur and hopes of a trade deal have been reignited as the leaders of the world’s largest economies agreed to resume negotiations. While existing tariffs on Chinese goods will remain, President Trump will not press ahead with imposing additional tariffs on $325 B of Chinese imports. Notably, Trump also reversed his previous stance on Huawei with US firms once again able to sell equipment to the company, only six weeks after the decision was taken to blacklist the Chinese telecom firm back in May.

Markets rallied on the news, opening at record highs on Monday with the S&P 500 rising by 1.2%. Technology stocks were particularly in favour due to the softer stance adopted in relation to Huawei.

Temporary truce?

Both sides have incentive to reach an amicable agreement. In particular, the Chinese, whose economy continues to show signs of a slowdown. June manufacturing data has displayed weaknesses across all sectors, notably from small companies, which are the backbone of the Chinese economy.

As China continues to rely heavily on monetary easing, continued economic weakness gives the country little room to manoeuvre in its negotiations with the US. Meanwhile, the US appears to be on stronger economic footing with manufacturing data coming in higher than expected in June. Whilst other economic data releases out of the US have been not been overly stellar, the outlook for the economy is more optimistic than China. Furthermore, Trump’s approval rating is stable and the S&P 500 is up 19% since the start of the year. This allows the US administration to hold its ground on contentious trade issues, potentially delaying a speedy resolution to the trade war.

Financial market implications?

The relief in financial markets may be short term, however. Trump’s lukewarm statement “We’re right back on track. We’ll see what happens” still leaves much uncertainty in terms of when and how this deal would be reached. There have also been no major breakthroughs on any of the key fundamental sticking points that led to the previous escalation in tensions in the first place. Thus, this uncertainty is likely to drag on the global economy and with the truce tentative at best, supply chains will continue to be disrupted.

The greenback surged Monday on the back of the ceasefire news, but the fixed income market did not rally, continuing to trade within its recent ranges, highlighting that the market is still pricing in a rate cut at the Fed’s next meeting in July.

The détente between China and the US may have eased some of the aggressive rate cut expectations, at least in the short term, the lingering trade tariff uncertainty persists. With no clear resolution for the trade war yet, the outlook for the dollar remains muted.

Author: Nirvani Sookdeo