G20: Central banks may have the last word

At the G20 meeting, all eyes will be on Donald Trump and Xi Jinping. Markets are hoping for a friendly encounter. Friendly it could indeed be since Trump has much less time than Xi to resolve the dispute. After all, he aims for re-election next year and needs to declare victory at some point. So far, tariff implementation has been only a fraction of what has been threatened and has been sure not to place too much of a burden on the US consumer so as not to upset Trump’s constituency.

The most likely scenario is that Trump and Xi resume negotiations (see table below). Potentially, they could freeze the status quo between the US and China on the current tariffs for a limited period of time. The car tariffs, however, would be exempt from this since they are global in nature and much more directed towards the European Union and Japan. An event outside of this main scenario, positive or negative, would have an effect on markets.

No matter what happens and how markets will react, central bank policy is likely to snap back into focus. Should Donald and Xi surprise with a speedy resolution, markets would rally until fears over central banks tightening conditions would resurface. Anything worse than the “main scenario” would initially have markets selling off until central banks intervene with stabilizing measures.

Rather than being handcuffed by markets, the U.S. Federal Reserve (Fed) will react to underlying growth conditions beneath the surface of market reactions. Currently, global growth is ok but mainly driven by the services and consumer sectors. Currently, we believe that the manufacturing sector is the issue and without any progress on the trade dispute front, a substantial improvement of the sector will remain difficult.

Depending on the economy’s growth path, the Fed and other central banks will tighten or loosen their respective policies, which will prove to be a difficult balancing act.

What can we expect from the G20 regarding the US and China?