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28 June 2019


This G20 meeting has been reduced to a G2 event.

Indeed, all eyes have turned to the Xi-Trump meeting. The US President had already warned that without a meeting, China could face another batch of tariffs on the remaining USD 300 billion worth of trade with the US, which so far has been tariff-free. The question is whether China will succumb to the bluster out of Washington. While nothing is written in stone, the most likely scenario going forward should be one of muddling through.

Exacerbating the current situation would help no one. The recent set of data out of the US has been underwhelming. The jobs data, consumer confidence and PMI data were all below expectations. Perhaps next week’s ISM figure could signal that US manufacturing is contracting. The odds are high. In China, authorities seem to have already accepted slower growth and Beijing speaks of the so-called long march towards technological independence. That said, slower growth will nevertheless hurt, and is a threat regarding social unrest.

Hence, one might expect both nations to declare that they are back on speaking terms and the US to shelve new tariffs for now. Whether the markets would cheer such an outcome remains to be seen. After all, it doesn’t bring a solution to the current trade conflict which has shaken global supply chains and has led to business leaders deferring investments.

Of course, President Trump is unpredictable. He has walked out of talks before, e.g. the last meeting with North Korean President Kim Jung Un. The other two scenarios, trade deal or fresh tariffs, look less probable. President Trump needs to keep the door open for a deal eventually. His election campaign has started but leaves him with another 14 months or so. Hence, a deal between now and year end would help him, as the positive effects could be felt before the electorate votes.

All this highlights the importance of geopolitics today. Nevertheless, earnings results are finally what counts for equity markets. Within another couple of weeks, we’ll have some glimpses of US second-quarter earnings. In the past few weeks, expectations for 2019 have come off quite a bit and the reduction has not stopped yet. That leaves US markets anything but cheap. The mix investors are struggling with is one where geopolitics, valuations and very light equity positioning interfere with one another. And all this against a backdrop of slowing growth. Not an easy mix I’d say.