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02 July 2019

China and the US push the pause button 

The cease-fire announced at the G20 meeting in Osaka is the best that markets could have hoped for.

Both China and the US will resume trade talks and the last USD 300 billion in trade that Trump threatened to put tariffs on will be left tariff-free. China will in the meantime buy some extra grain from the US and Washington might become a bit less severe in judging what tech products can be sold to China. An all-round trade deal is still miles away, but of course, preventing further escalation will do for now. Whether this truce will come in time to prevent economic damage being seen in this week’s data is doubtful. Last week, the Chicago PMI sank below 50 and because of the high correlation with the ISM data, today’s manufacturing ISM figure could come out just north or just south of this threshold. But there is more to chew on this week, there is the Tankan in Japan, PMI data in Europe and jobs data in the US.

Speaking of the Tankan, the headline measure fell to 7 in June, the lowest since September 2016 and suggesting a bigger slowdown in manufacturing activity. This setback is also confirmed elsewhere. In China, the Caixin PMI slid to 49.4 from 50.2 on the back of falling export orders. Fully in line with this weaker data, the economists at Morgan Stanley cut their global growth outlook for both 2019 and 2020, to respectively 3 and 3.2% of GDP.

More stimulus is going to be the result. In China, the People's Bank of China could come to the rescue and so could Beijing. Monetary and/or fiscal flexibility will be applied. In the US, also depending on this week’s data, the Fed could cut by the end of this month. And depending on European PMI data, the European Central Bank could prepare markets for additional stimulus.

The question, however, is whether like in the first half of the year collapsing interest rates and bond yields will provide a safety net for equity markets while earnings plunge. After all, during the first six months asset prices rose mainly because of bearish positioning and a monetary U-turn in the US. It might be difficult to copy-paste that scenario going forward. But for now, let’s enjoy the trade truce.