Although we have received a lot of mixed signals in recent days, we still stick to a 60% probability of a ceasefire in the US-China trade war after the G20 meeting over the weekend (dinner to be Saturday evening). This should be positive for risk markets. We see roughly five reasons.
1. Trump initiated the talks this time. Since leaving the negotiation table in May and starting the trade war, Trump has several times said that 'now is not the right time to talk to China'. The fact that Trump initiated this round of talks by first calling Chinese President Xi Jinping and then preparing for a 'meeting plus dinner' at the G20, suggests that Trump has changed his view and now believes it is the right time to start talking again.
2. Trump's hand starting to weaken? The reason that Trump has taken the step to meet with Xi could very well be related to the fact that US stock markets have started to wobble. Trump has been boasting that Chinese markets were collapsing and US markets were strong. This picture has changed recently as US markets have suffered a set-back, whereas Chinese markets have actually stabilised. Hence based on pure relative stock market performance, Trump's hand has weakened a bit lately. Using Trump's 'Art of the Deal' logic, his philosophy is to put maximum pressure on his opponent. But the pressure may decline if it becomes clearer that the US will also pay a price for a trade war.
3. Further escalation could back-fire. If the US and China do not reach a ceasefire the next step will be at least a further increase in tariffs on 1 January from 10% to 25% on USD200bn worth of Chinese goods. In addition a further escalation with 10% tariffs on the rest of imports from China, corresponding to USD267bn, would start to have a bigger impact on US manufacturers and consumers. Companies are increasingly starting to complain about the tariffs and consumers would also feel more pain. China's response could slowly start to be a boycott of US consumer goods such as iPhones and GM cars. It would hurt the stocks of many US companies with high exposure to China - and hence add to the stock market headwinds. A consumer boycott may not be orchestrated from Beijing but could simply be triggered by some Chinese celebrities urging a boycott on social media. While Chinese consumers like US consumer brands, their patriotism should also not be underestimated. If the Chinese economy faces serious pressure due to US tariffs, consumers would likely start supporting their own products.
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