Global trade – Trump and Xi Jinping agree on 90 day ceasefire. At a closely watched bilateral meeting at the margins of the G20 summit in Buenos Aires, presidents Trump and Xi Jinping agreed on a 90 day truce in the US-China trade conflict. That agreement implies that import tariffs will be kept on hold in the coming months, so the US threat to raise import tariffs on USD 200bn worth of imports from 10 to 25% per 1 January 2019 will be off the cards (for now). It also means that the US will not broaden the base subject to tariffs to all imports from China any time soon (that would have entailed broadening the base by over USD 250bn). The ceasefire is certainly market friendly, with for instance stock markets gaining, the CNY strengthening versus USD and the oil price recovering (see below). It also takes away, for the time being, some of the downside risks to Chinese growth as well as upside risks to US inflation. Still, it is quite early to judge whether the US and China will be able to bridge the remaining difference of opinion in the months ahead.
China looks ready to substantially increase agricultural and energy imports from the US, which would help reducing its bilateral trade surplus with the US. China already took steps to open up its markets by, for instance, liberalising its FDI regime (including that for the financial sector) and lowering overall import tariffs. The US would be keen to see China lower its import tariffs for US cars in particular; those had been raised to 40% as the trade conflict escalated. While it is not likely that China will give up its ‘state capitalist model’, neither its strategy to create ‘national champions’ with a global presence, it is possible that some compromise could be found in the areas of intellectual property protection. Whatever the outcomes of these negotiations, we think China’s economic growth slowdown will remain gradual, as Beijing will offset potential downside risks from the trade conflict by adding more stimulus. See our China Outlook for 2019, Stimulus offset trade risks, published earlier today (Arjen van Dijkhuizen).
Oil prices recover ahead of OPEC – Since early October, oil prices have shown an impressive drop. That downward pressure was fuelled by a sell-off in speculative long positions. This sell-off was triggered by several arguments, such as US/China trade war fears, the eight waivers given by the US to consumers of Iranian oil, and the break of technical support levels. However, on Monday, oil prices recovered significantly following the truce in the US-China trade conflict that was reached in Buenos Aires. On top of that, both Saudi Arabia and Russia confirmed their cooperation in stabilising oil markets. This was a clear signal ahead of the upcoming OPEC meeting in Vienna this Thursday. Market expectations are mixed and divided between a) no change in production levels by OPEC and its partners (mainly Russia) or b) a fresh cut of crude production between 1 and 1.5 mb/d. It seems a huge dilemma for especially Saudi Arabia. That country has to choose between market stability in supply and demand (and thus lower oil production to support prices) or the result of such a production cut (higher prices) which would mean support for US shale producers benefitting from these higher prices. (Hans van Cleef).