U.S.-China Ceasefire: Reasonable Outcome For Markets, Brief Respite For Economies

No new tariffs for three months

At the 2018 G-20 Buenos Aires summit that concluded last weekend in Argentina, U.S. President Donald Trump and Chinese President Xi Jinping agreed not to impose any new tariffs for three months to allow negotiations to continue at the technocrat level. This ceasefire delays the ramp up in the U.S. tariff rate from 10% to 25% that was scheduled for the Jan. 1 (impacting $200 billion of Chinese imports). The agreement stalls Trump’s threat of new tariffs against the final $267 billion of imports from China, at least temporarily. In response, China “will agree to purchase a not yet agreed upon, but very substantial”1 amount of U.S. exports.

A positive turn in the trade war

This is a positive turn in the trade war, but it falls close to the consensus expectations from economists. A more positive outcome would have contained substantive details and/or a longer pause (e.g., six months). The three-month ceasefire by no means guarantees that a final trade deal will be struck, but it improves the risk distribution for markets.

Impact on global equities

We view the G-20 meeting as a small tailwind for global equities, with the order of impact being most positive for China and emerging markets (EM) and least positive for the U.S. This ceasefire is probably not long enough to meaningfully reduce uncertainty for the CEOs (chief executive officers) of multinational businesses. Therefore, we expect U.S. (and global) capital expenditure to remain subdued until a lasting agreement is reached.

U.S. perspective

Until very recently, there has been a little discernible impact from the trade war onto our high-frequency business confidence tracker. In the November regional U.S. Federal Reserve (Fed) surveys, however, we saw a marked step down in the optimism of U.S. manufacturing executives. It’s difficult to disentangle how much of this was from lingering trade concerns versus the moderation in global growth rates and the collapse in crude oil prices—but we suspect the latter forces are playing a more significant role.

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Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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