President Trump and President Xi declared a temporary trade truce at the 2018 G20 summit in Buenos Aires, which ran from 30 November to 1 December, in line with our out-of-consensus views.

The much anticipated dinner between the two leaders resulted in the first major breakthrough since talks broke down in May. For now, China has agreed to buy more US products, including agricultural goods, and to tackle the trade imbalance concern. President Xi also agreed to designate fentanyl a controlled substance, in a move which was described as a “wonderful humanitarian gesture” in a statement issued by the White House on Saturday.

On trade, President Trump said the US will not go ahead with the implementation of a 25% tariff rate scheduled for January. The tariffs on $200 billion worth of products will be left at the 10% rate for the next 90 days while both parties attempt to negotiate structural changes.   

Signs of reapproachment between China and the US is certainly good news. This does not reflect a definitive shift in the relationship between the US and China, but the opening up of negotiations is certainly a big step in the right direction.

We expect the trade war issue to come back on the table as both sides still seem far away from a fully settled position. However, for now, we expect markets to reject some of the more extreme scenarios which have been weighing on sentiment, which will be reflected in asset prices.

In emerging market assets, the effect on sentiment has been such that valuations have become noticeably depressed. The price-earnings ratio (P/E ratio) for EM is currently around 10 while the difference between EM price-to-book ratio and that of world equities is below average, historically. In developed markets, there is evidence the US risky assets space has been affected by the negative sentiment stemming from the trade war too.

We expect the cover provided by the positive G20 meeting to alleviate extreme fears in the market regarding a total breakdown in the relationship between the US and China. We also expect risky asset markets, especially emerging markets (EM) to respond positively, helped on by a more measured Federal Reserve. In addition, a variety of policy measures undertaken by Chinese authorities, including fiscal stimulus, are likely to provide additional support.

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