AXA IM responds to G20 outcomes

December 3, 2018

By Aidan Yao and David Page, AXA IM

A truce in the US-China trade war following the G20 meeting between President Xi and Trump has led to a positive response in financial markets and aroused optimism that a temporary ceasefire could become permanent. At Buenos Aries, the two leaders agreed to resume trade talks, which will last for 90 days, to reshape the future of US and China trade relations. These will include: 1) additional purchases by China of US agricultural and energy products, 2) the details on further opening-up of the Chinese markets, and 3) structural issues, surrounding technology transfer, intellectual-property rights protection, and non-tariff barriers. The resumption of talks is a positive turn of events. However, we caution that significant uncertainty remains regarding the evolution of these negotiations over the coming 90 days and see a smooth resolution of the outstanding issues as difficult. For the time being, we retain our baseline forecast that the US will raise the tariff rate to 25% on $250bn of Chinese goods at the end of the 90-day period, but recognize that the odds of a more benign outcome of non-further-escalation has increased post the G20 meeting.

Below are our key takeaways in detail:

The outcome of the meeting between Presidents Trump and Xi has been well received by markets today, with a clear risk-on reaction in Asia and early European trade. However, the persistence of these moves hinges on the substance of trade talks over the coming 90 days. The G20 meeting has helped avoid a short-term, worst-case scenario of material escalation in protectionism, but that cannot be a perpetual source of market strength.

Yet this weekend’s real accomplishment was an agreement to resume talks, without reaching a breakthrough on any of the fundamental disagreements. Indeed, it is not obvious to us that this resolution included anything that was not on the table earlier this year (May), when US Treasury Secretary Mnuchin declared the suspension of a trade war. The only tangible benefit a 60-day extension of the period until tariff rates rise again. To our minds, President Xi has not budged by much, if at all