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All roads lead to the G20

  • September 2011: “China is neither an ally or a friend — they want to beat us and own our country.”  A tweet from Donald Trump about Chinas trade practices.
  • During the 2016 Presidential race, Donald Trump campaigned on a platform of “America First”, that included renegotiating trade deals and tariffs.
  • In April 2018, shortly after asking the United States Trade Representative (USTR) to investigate applying tariffs on U.S. $50–60 billion worth of Chinese goods, President Trump said “we have a trade deficit of $500 billion a year, with intellectual property (IP) theft of another $300 billion. We cannot let this continue.”

While all roads lead to the G20 meeting which starts in Osaka, Japan this Friday, the road where the trade war began can be traced back to U.S. President Donald Trump from 2011. In this context the current trade war should not come as a great surprise. President Trump is delivering on his election promise to “Make America Great Again” and is doing it his way.

Tariffs on China are part of that, designed to make Chinese goods more expensive and boost U.S. production. The implementation of tariffs was designed to force China to reconsider its trade practices and revise trade deals. The two sides appeared close to a deal in April; however, at the last moment, China demanded major revisions to the 150-page draft agreement.

Even now, almost two months later, it’s not clear what the exact sticking points were. Most likely differences over sensitive topics such as intellectual property rights/protection, subsidies to specific industries and SOEs (state-owned enterprise). As well as resistance to long standing U.S. demands for China to remove internet restrictions and for China to move to a more flexible market-based exchange rate system which would allow the Yuan to strengthen in value.

President Trump and Xi are scheduled to meet over dinner on Saturday night and given the backdrop above, the expectation for the meeting isn’t for a deal. Rather it is for the two leaders to clear a pathway for negotiations to recommence. In this context three possible outcomes from the meeting are outlined below.

1. Escalation:

  • China digs in for another “long march” with the hope that Trump loses the U.S. election, and they can negotiate with a more reasonable president.
  • The U.S. in response levies tariffs on further ~$300 billion of imports from China in early July.
  • The FED eases, however, the damage to the real economy outweighs.

Implications –Risk off and in time:

  • ASX200 retests the 5400 lows from December 2018.
  • The AUD, NZD and CAD fall against the U.S. dollar.
  • Crude oil falls, while gold continues higher towards U.S.$1500.

2. Pause and committed to working towards a deal:

  • New tariffs are put on hold and there is an upbeat tone in the statement including the possibility existing tariffs will be removed in due course.
  • Fed still cuts rates

Implications – Risk on and in time:

  • Equities: rally approximately 5-10%, taking the ASX200 to 7000.
  • FX: Commodity currencies including the AUD, NZD and CAD rally vs the U.S. dollar.
  • Commodities: Crude oil higher, gold lower.

An uneasy type of truce:

  • China and U.S. give each other the benefit of the doubt and agree to sit down to talk. New tariffs are delayed though there is no mention or timetable for the removal of existing tariffs.
  • Its a last attempt to avoid a further economic downturn, but the two sides remain a long way away on key points.
  • Fed still cuts rates

Implications - initially Risk on which in time becomes Risk off:

  • AX200 rallies initially (maybe to a new all-time high) and then falls away.
  • Commodity currencies such as AUD, NZD and CAD initially rally vs the U.S. dollar but then fall away.
  • Gold sells off but then rallies, crude oil does the opposite.

All roads lead to the G20

If you would like to hear more about the G20 and possible outcomes, please join City Index analyst Tony Sycamore for his “All roads lead to the G20” webinar Wednesday 26th of June at 12pm AEST.

Register your free place here: https://register.gotowebinar.com/register/6639525608777918721

Source Tradingview. The figures stated are as of the 25th of June 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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