Market Comment - Trade dispute: a positive step, but not yet over

News item -

A truce has been called in the trade dispute between the US and China. The countries established a 90-day period to resolve differences, with no escalation in tariffs during that time.

Chinese President Xi Jinping and US President Donald Trump agreed on a truce in the trade war between their countries at the G-20 summit this weekend. As details are slowly emerging from the Buenos Aires meeting, it is clear that for a period of 90 days, US tariffs will stay at 10% and will not be increased to 25%, as had been threatened to occur on 1 January.

During these 90 days, bilateral discussions will intensify with the goal of finding a solution for the trade disagreement between the two countries. If a solution is not found within 90 days, US tariffs will go up to 25%. With Trump stepping back from his threat to raise tariffs on 1 January, the G-20 summit also saw China agreeing to buy a substantial amount of farm, energy and industrial goods from the US to improve the trade balance between the two countries.

A positive step

In the run-up to the G-20 summit, any outcome from the meeting between the US and Chinese presidents was difficult to predict. The truce that was agreed upon should therefore certainly be seen as a positive step. After all, just like in conventional wars, there is a truce before there is peace. Both countries, and in fact the whole global economy, will benefit if the dispute is ended. The truce is therefore an important step, but it is too soon to call the end of the trade war.

Much will depend on the discussions over the next 90 days and the willingness on both sides to agree to a deal. Predicting the final outcome is difficult, as the discussions during the year between the two countries have shown that there are more issues to resolve than China’s trade surplus with the US.

Trade truce should be well received by markets

Going into the weekend before the summit, the establishment of some kind of truce was the expected scenario in the market, but other scenarios were also considered. The positive step of agreeing to talk and establishing a deadline is therefore expected to be well received by financial markets.

This year, the Chinese stock market has been suffering from the trade war. Europe has also seen a slowdown in growth that can partially be linked to the higher tariffs. The correction in the US market in October, however, was believed to be more the result of higher interest rates and lower earnings forecasts. Fed Chairman Jerome Powell’s remarks last week on interest rates, where he noted US rates are “just below” what might be considered the neutral rate, already provided some support for equity markets. This trade-war truce is likewise expected to provide some support.

The ABN AMRO Investment Committee recommends a modest overweight in equities. In our view, this is the most appropriate allocation until there is more clarity on what is going to happen after the 90 day deadline or until both sides have agreed on a final solution. After all, it takes two to tango.

Richard de Groot
Global Head Investment Centre