Headed into the G20 summit in Argentina, Goldman suggested the “most likely” outcome of the Trump-Xi dinner was “further escalation” or, more to the point, a half-hearted attempt on the part of both sides to improve the optics but little to nothing in the way of concrete progress.
That said, the bank assigned just a little more than 50% subjective odds to that outcome. A “close second” was a “pause” scenario which, long story short, is exactly what came out of the Saturday dinner in Buenos Aires.
Risk assets were in rally mode early on, with EM FX surging and equity futures moving sharply higher as traders cheer the ceasefire which removes the psychological overhang from the looming hike to the tariff rate applied to the $200 billion in Chinese goods that were taxed by Trump starting in late September.
It’s hard to argue that the 90-day detente isn’t good news. It effectively means no further escalations between Washington and Beijing are coming for at least three months and the fact that markets apparently no longer have to worry about the USTR publishing a list in conjunction with the remainder of Chinese imports seems like an exceptionally positive development. Further, this comes hot on the heels of Jerome Powell’s tacit admission of a communications mistake, a dovish turn that catalyzed the best week for U.S. stocks since 2011 last week.
Now, the two most daunting near-term headwinds for markets have been removed, even if the longer-term picture remains unchanged.
Still, there are concerns. On one hand, it wasn’t exactly a shocker that a two-hour dinner didn’t produce a comprehensive agreement on the long list of exceptionally contentious issues that are at the heart of the trade dispute. So, the absence of such a comprehensive deal shouldn’t impede a short-term risk bounce. But if you’re thinking beyond next week or beyond this month, the picture is a lot more cloudy.
Goldman picks up on that in a followup to their Trump-Xi analysis from last week. After noting that the result was indeed consistent with their “pause scenario” and after running through the key points from the truce, the bank gets down to business.
“There appears to have been no concrete progress on the other important issues of market access, IPR protection, cyber attacks, and forced technology transfer (the latter two US concerns have always been denied by Chinese policymakers) which are left for working level officials to work out in the next 90 days, so the actual amount of concrete progress made at this meeting appears to have been quite limited, as expected”, Goldman writes, adding that while “the Xi-Trump dinner has clearly improved the tone of the US-China relationship for the time being [likely catalyzing] an initial positive market reaction, the ‘pause’ prolongs the period of uncertainty around the eventual structure of trade relations between the two countries.”
Right. Because that’s the very definition of an exercise in can-kicking, which is what this is. The bank continues, noting that “the specter of higher and broader US tariffs remains [and] with additional time to pursue negotiations, we think the chance of a comprehensive deal that involves rollback of tariffs is slightly higher than before, but still not our base case—perhaps a 20% probability over the next three months.”
Those clearly aren’t great odds, although that’s nothing more than a subjective assessment and should be read as such.
As far as what this means for China, Goldman states the obvious which is that this buys some time for policymakers to stabilize the economy without having to worry about any errant tweets from Trump or random announcements from Lighthizer that might deep-six sentiment overnight and deep-seven (get it? there’s a 7-handle joke there) the yuan.
All in all then, it’s the same story: positive in the near-term, indeterminate after 90 days.