Author
Author

Michael Stritch, CFA

Chief Investment Officer and National
Head of Investments - BMO Wealth Management.
Author
Author

Yung-Yu Ma, Ph.D.

Chief Investment Strategist - BMO Wealth Management
June 25, 2019
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June 25, 2019

“I’d go back to December turn around and make it all right.” - Taylor Swift

 

President Trump and President Xi are again scheduled for an “extended meeting”* at the G20 in Osaka, Japan on June 28 and 29.  This is a redux of their G20 meeting in December last year in Buenos Aires when the two agreed to a truce while negotiations ramped up. Since then, the near-agreement ended in tatters as China backtracked on key provisions, President Trump raised tariffs on Chinese goods from 10% to 25% (Exhibit #1),and the U.S. government placed one of China’s largest companies, Huawei, on an “Entity List” restricting U.S. and international companies’ business dealings with the Chinese firm (5/16/2019). Similar to the G20 meeting in December, this upcoming visit has heightened expectations that President Trump and President Xi will get trade discussions back on track.

Exhibit #1

Exhibit 1

 

In broad terms, the outcome of the Trump-Xi talks may go in one of three general directions: move forward on trade negotiations with indications of softening positions, move forward on trade negotiations while keeping the status quo of tariffs and trade restrictions, or perhaps agree to only “maintain communication” amid the prospect of further escalation. The market would clearly most welcome the first path, and softening positions could be in the form of more compromising language or tangible gestures such as Chinese purchases of U.S. agriculture or President Trump loosening the stranglehold on Huawei. The third path – the path of most destruction – implies further escalation that would hurt an already slowing U.S. economy. Trade talk deterioration might shift the market focus to the prospect of Fed easing, but we caution that faith in the “bad news is good news” narrative to support the market (when interest rates are barely over 2%) may be peaking. 

 

Even with the more benign G20 meeting outcomes, achieving a long-term grand compromise will be a difficult task. China, for its part, wants to keep momentum in its high tech endeavors, provide enough growth for social and economic stability, and not be seen as cowing to U.S. pressure. For the U.S., the questions are mostly about what President Trump believes – will the economy and markets stay strong before the election without a deal?  Will Fed action rescue the economy if the trade war escalates? Are aid packages sufficient to keep the support of farmers? Are tariffs making us richer and stronger? If Chinese technology is a national security threat, is it still negotiable?  Meanwhile, the technology confrontation with China continues unabated. On June 21, the U.S. Department of Commerce added four more Chinese companies to its “Entity List,” including a significant manufacturer of supercomputers that relies on U.S. technology. Congressional leaders from both parties have also been vocal about getting tough on China – it’s a political winner for now.  


The trade agreement breakdown in May showed what is unacceptable to both parties, and it has been clear that a meeting between President Trump and President Xi would be required to get things back on track. Positive words and developments may come out of the G20 meeting, but whether there is sufficient middle ground for a deal remains to be seen.

 

* @realdonaldtrump Tweet – June 18, 2019 6:39 a.m.

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