- As widely expected, a Xi-Trump assembly finished with a ceasefire in a trade war. The trade anathema on Huawei was also lifted, during slightest partially.
- The ceasefire is good news in a clarity that it confirms that both sides wish to make a trade deal. President Trump’s comments thereafter advise he sees a trade understanding as a pivotal member of his choosing campaign.
- However, vast obstacles sojourn to strech a understanding that satisfies both sides and we still design a hilly trail ahead.
- We continue to demeanour for high sensitivity in equity markets in a brief tenure and do not see a ceasefire as a diversion changer for FX markets.
The ceasefire is a reality
As widely expected, a ceasefire became a reality. Here is what we know:
- There will be no new tariffs on China for now.
- The trade talks will restart.
- There is no deadline on a intensity tariff increase, as was a box with a prior ceasefire, where tariffs were ostensible to go adult after 3 months if there was not adequate swell in trade talks.
- Regarding a export anathema on Huawei, a news was not really clear, yet it seems there will be during slightest a prejudiced lifting of a trade ban. Initially Trump pronounced he had told Xi that a Huawei emanate would have to wait until a ‘very end’. However, he also said, “we sell to Huawei a extensive volume of product that goes into a several things they make and that is ok”. A Chinese diplomat said: “As for Trump’s comments that some restrictions on Huawei will be removed, we will of march acquire this if those difference are put into action”. Trump pronounced during a press discussion that there would be a assembly on Sunday on Huawei and a Commerce Department list. The interpretation by many media, including a Chinese, was that US companies could now sell to Huawei again.
In his press conference, Trump mentioned farmers as poignant beneficiaries of a trade understanding with China. Trump also mentioned a clever US economy. It suggests to us that Trump prefers a trade understanding with China over no understanding as partial of his choosing campaign. It would assistance him keep a clever economy going and give vicious gifts to a farmers, who are essential electorate in several pitch states.
During a press discussion Trump pronounced a US and China could be “strategic partners”. However, this is really many during contingency with any executive US request finished during his administration, that describes China as a revisionist energy (most recently in a US ‘Indo-Pacific Strategy’.
– announcement –
Where to go from here: A hilly trail to a trade deal
We now design a new spin of high-level trade talks soon possibly in Washington or Beijing (mostly expected in Beijing, as they were in Washington final time.) We still design negotiations to be formidable as a dual sides seem distant from any other on vicious points. China has its’ ‘red lines’, that are on points that a US side has seen as peerless for a deal.
Also, for now, Trump is not in a precipitate to make a deal. Although a US economy has slowed, it is still utterly robust. Stock markets have also remained clever with new highs reached lately.
The Chinese economy is pang more, yet China’s ‘red lines’ are accurately that: areas where it will not pierce and where there is extended accord in China that there should be no concessions. Hence, China will not nudge when it comes to a US direct to change specific laws and when it comes to a need for a some-more offset denunciation and altogether trade deal. Xi indicated this during a G20 assembly when he pronounced China contingency “defend sovereignty, honour and core interests”.
The bottom line is that while a ceasefire has been concluded to, we still design a hilly trail from here towards a trade understanding and renewed escalation can still not be ruled out during some point. We do design a trade understanding to be struck during H2, though, as Trump should be means to get a understanding he can sell as a large win to a US public. It would also be a understanding that can advantage him in his choosing campaign, where he is expected to partly benefaction himself as a guarantor of a clever economy and a one who delivered a poignant alleviation for US farmers and business opportunities in China.
What about equities? Good news mostly discounted, and repairs already finished to a business cycle
Equities are maybe a many unprotected item category to a trade war. This means a ceasefire is a positive. The fact that markets have left adult given 5 May, even yet it noted a re-escalation of a trade fight (as Trump aborted a talks and tweeted that he would lift tariffs on USD200bn of Chinese products from 10% to 25%, effective 10 May), does not prove that trade no longer matters. Rather, it is due to executive banks, led by a Fed, signalling an assertive financial easing. That (at slightest in a eyes of a market) neutralised some of a disastrous effects from a trade conflict.
However, from an equities prove of view, a bottom box of a G20 talks was also a best case, and an outcome that we consider was many discounted. Even this ‘best case’ entails copiousness of uncertainty, and regardless, we think a lot of a repairs to a business cycle, a gain cycle and confidence, is already done. Since a trade fight started behind in Mar 2018, prolongation and certainty in prolongation in sold has deteriorated. Plans for collateral output have been shelved. 5 May represents another hit, again clearly manifest in many Jun certainty indicators (even yet models and a heading indicators advise they should have improved). This tells us that corporates are supportive to trade issues. Many companies are also looking to pierce prolongation to variegate their supply chain, yet with inauspicious effects on productivity.
This spells risks for gain – reduce expansion is a risk to a tip line, diseased capability is a risk to margins. In dual weeks a tellurian gain deteriorate will flog off. We have low expectations due to a above factors and we fear that analysts are behind a curve, unwell to cut estimates enough. On aggregate, a outcome could defect for a initial time in many years. There is a risk of an gain retrogression in 2019. The trade fight could also be a ideal forgive (scapegoat) for companies to reduce superintendence (lower superintendence is customarily a biggest trigger for a reduce share price).
We so continue to design high sensitivity in a brief tenure with a transparent risk of equity drawdowns. Renewed escalation in a trade fight can still not be ruled out.
However, holding a longer view, we also trust a understanding will eventually be struck before year-end and yield procedure for a tellurian economy to redeem again in 2020. We therefore design equities to outperform holds on a 12-month horizon.
In a Nordic star we have many companies unprotected to a trade war, by several channels. Below is a outline of a many and slightest influenced ones.
Ceasefire no diversion changer for FX markets
The ceasefire agreement is not a diversion changer for FX and commodity markets in a view. The USD should stay broadly unchanged. The reduce luck of new US tariffs on China is disastrous for a USD, yet a mitigating cause is that a contingency a Fed will cut by 50bp in Jul will expected go down, that would be USD-positive. Commodity prices should stay good upheld by a softened opinion for a trade deal. That in spin should advantage commodity currencies, a AUD, NZD, CAD and NOK. Finally, we could see this change in tinge in a trade talks import a bit on a JPY.