Market Comment - A fragile truce

News item -

This weekend, during their negotiations at the long-awaited G20 summit in Japan, US President Trump and Chinese President Xi-Jinping agreed to a new trade truce. Albeit a fragile one.

Trump and Xi-Jinping have agreed on the following:

  • negotiations between the two countries must resume;
  • the US will not impose new tariffs on USD 300 billion of Chinese imports during these negotiations;
  • US companies can again trade with the Chinese IT company Huawei if there are no national security issues.

The outcome was in line with the market and our expectations.

Uncertainty to remain high…

Although it is positive that there has been no further escalation and that a truce has been reached, this truce seems fragile for several reasons. Firstly, there is no evidence that progress has been made on any of the significant strategic differences (that led to a breakdown in the talks in the first place) and there is no roadmap on how this will happen in the future. Secondly, tariff increases made in the past months have not been reversed. The announcement about Huawei goes in the right direction, but the uncertainty remains very high. Trump said that this "case would be resolved at the very end of the negotiation process."

…weighing on economy…

Political uncertainty will remain high and weigh on the growth prospects of the global economy. While the consumer remains strong for the moment, especially in the United States, business confidence in the manufacturing sector has deteriorated significantly for several months in the main regions of the world. This movement probably reflects the impact of the trade war on international trade and, ultimately, investments. For now, the services sector and domestic demand have remained resilient, but the longer the weakness in manufacturing and trade persist, the more likely it is to spread.

...and encouraging central banks

Central banks will act in the coming months to prevent a recession. Investors are now anticipating three rate cuts from the US Federal Reserve by the end of the year and we expect a 25 basis point reduction by the end of July. The European Central Bank, meanwhile, will likely cut interest rates in July and announce a new round of asset purchases by the end of the year. Finally, the Chinese authorities will likely step up the pace of stimulus, with the central bank likely to cut its main policy rate as well as pumping more liquidity into the financial system.

Positive market reaction

As further escalation has been avoided, the initial reaction of equity markets is positive. We expect, however, that investors' attention will quickly shift to business confidence statistics this week and to second-quarter corporate earnings in mid-July. In the meantime, they will watch Trump's tweets and the speeches of central banks.

Neutral approach maintained

Our advice to clients has not changed as a result of the G20 meeting outcome. We still believe our current, cautious approach is appropriate and hold on to our recommendation for a neutral equity allocation.