DWS: G20 summit: No big deal, we guess

29 nov 2018

By Johannes Müller, Head of Macro Research

G20 summit to be one more event for which first market reactions could be misleading, as we expect a quick fix, but no sustainable solution. Markets are likely to concentrate on any tariff ceasefire. But we believe tariffs are just one means for the United States to pursue its real goal: to contain China's rise. Short-term market reactions are hard to predict. Any kind of quick-fix deal would be a weak basis for a year-end rally in equities.

Market expectations for the G20 meeting are hard to grasp

The U.S.-China trade dispute is often cited as one of investors' main worries. At present we are at what might be called the peak of no clarity – and getting some sort of certainty, even if, as with the UK's Brexit, the deal is far from perfect, may give markets a lift.

All eyes certainly will be on the G20 summit in Buenos Aires (November 30 to December 1), and especially on the highly anticipated meeting of the U.S. President, Donald Trump, and China's leader, Xi Jinping. It is widely believed that a 10% U.S. tariff on around 200bn U.S. dollars in Chinese goods will increase to 25% on January 1, 2019 should there be no agree-ment at the summit. Trump said that the U.S. could also impose tariffs on an additional 267bn dollars of Chinese goods. In autumn's tough markets, Chinese stocks have recently outperformed their U.S. peers, though only after taking a beating earlier. The outcome of the summit is highly uncertain, as is the degree to which markets have priced in disappointment or progress. While we believe investors would be ill advised to put their faith in a year-end rally based solely on some kind of positive signal from the G20, it might still make them happy for a bit if the can is simply being kicked down the road. However, we believe that if the U.S. is going to trigger tariff increases as announced, it will still weigh on markets.

Summit outcomes: Trump might provide a quick fix, but the tensions have deep roots

There are good reasons to assume that Trump is aiming for some kind of agreement over the weekend. First, Trump's latest remark on China is that "They very much want to make a deal." Second, the stock market's recent weakness might warn him that investors fear an escalation of the trade dispute. Third, Trump wants to show the world in a high-profile event that he is an accomplished dealmaker. Fourth, with the U.S.-China bilateral deficit set to rise to a record high this year, Trump might feel the urge to deliver some kind of progress. Whether this means a quick deal or an escalation remains an open question, however.

And yet any kind of agreement at the G20 seems unlikely to offer long-term reassurance. We believe the U.S.-China dispute is not just about trade balances. It has a geo-political and strategic dimension. The U.S. fears China's fast ascent on the global economic and political stage. China's growing influence over its neighbors (evident in its Belt and Road Initiative, formerly known as "One Belt One Road") and its aspiration to become a world leader in certain strategically important areas (as laid out in its "Made in China 2025" initiative), are likely to be the real issues for the current administration. This was made surprisingly clear in Vice President Mike Pence's speech at the

Hudson Institute in Washington. This idea gains inimportance, in light of the Republicans' loss of their majority in the House of Representatives, as Democrats seem to share the view that the U.S. needs more protection from China.

Trump's administration seems split between hardliners who promote more protectionism and isolation and those who have a more pragmatic approach and a focus on foreign business interests. As the Financial Times reported, the willingness of Wall Street leaders to try and build bridges with Beijing has attracted the ire of the more nationalist members of Mr. Trump's inner circle. "When these unpaid foreign agents engage in this kind of so-called diplomacy all they do is weaken this president and his negotiating position," White House adviser and leading China hawk Peter Navarro said this month. "No good can come of this."

Trump himself seems split between the two positions. The U.S. administration's handling of China has been inconsistent, with tariff exemptions granted for some sensitive retail goods, sanctions for single companies that were subsequently revoked, and Trump alternating praise and attacks with regards to Xi.