Wall Street takes on the Osaka truce between Donald Trump and Xi Jinping are trickling in.
Generally speaking, the “agreement” (if that’s the right word) was in line with most analysts’ base case headed into the weekend. Consensus had formed around the idea that Trump would likely agree to hold off on slapping the remainder of Chinese goods with tariffs and that the two leaders would agree to restart stalled talks.
Trump’s apparent Huawei relent was a bit of surprise and, for Goldman, has the potential to be market-friendly on the margins, although the bank’s quick take was far from a ringing “buy it all” endorsement.
For Barclays’ Jian Chang, the outcome of the Osaka meeting was a reflection of Trump’s willingness to make concessions in light of a series of factors including “a weakening US economy, recent poll data showing Trump trailing, lobbying from US tech companies and retailers, and China leveraging North Korea and announcing more credible threats”.
Elaborating a bit, it’s worth reiterating that if Beijing plays the long game, there’s only so long Trump can hold out without risking an outright revolt from corporate America and chancing a trade-related recession. You could easily write off the poor polling data (after all, it wasn’t reliable in 2016), but the fact is, Trump is worried about a recession next year. That’s one of the main reasons he won’t take his boot off Jerome Powell’s neck. Second, China’s threats are not idle. The FedEx investigation, the corporate blacklist, the prospective rare earths ban and rhetoric that suggests Xi is prepared to hunker down for a protracted war have perhaps given Trump pause.
For Barclays, the outcome of the Osaka meeting “has slightly exceeded the market expectations”, but doesn’t necessarily raise the odds of an actual deal.
Why not? Well, because if you ask Chang, Trump is unlikely to get a better deal than what he nearly secured prior to flying off the handle on May 5.
“From a US perspective, with China insisting the ‘restarted’ trade negotiations should be based on ‘equality and mutual respect’ (which in our view implies not making big concessions), we think any deal, if any, will likely be weaker than the c.150-page ‘grand deal’ that Trump could have achieved before the May breakdown”, Barclays says.
If that’s the case, Trump would be better off simply prolonging the discussions – keeping talks going without resorting to escalations, in an effort to avoid a scenario where he takes a watered down version of the previous deal. That would come with the added benefit of ensuring that the Fed remains on high alert and isn’t tempted to walk back rate cut expectations.
The bottom line, at this juncture, is that this is all about what’s going on inside Trump’s head. The fate of global trade and commerce and relations between the world’s two largest economies, hinges on the president’s decision calculus headed into an election year. Here’s Barclays one more time:
We think the outlook – escalation/de-escalation – will be largely dictated by President Trump’s strategy leading up to the 2020 election (among other things), with China’s stance being clear and consistent. We think the Trump administration continues to evaluate the cost/ benefit of various options, and navigating between being sufficiently tough on China and not causing an economic recession or market panic before the 2020 election.
Of course, how this evolves going forward will also depend on whether the Trump administration continues to squeeze Beijing at the margins by doing things like, for example, adding four firms tied to China’s super-computing industry to Commerce’s entity list or moving to curtail Chinese financial institutions’ access to dollars and the global banking system.
It would be decidedly difficult to keep any further escalations on those fronts from derailing the trade talks. Remember, earlier this year the Trump administration insisted that Huawei would not be an impediment to the trade negotiations. We all know how that turned out.