Xi/Trump meeting eyed as trade war heats up

Xi/Trump meeting eyed as trade war heats up

There have been a number of underlying risks that have contributed to the recent wobbles in financial markets and this weekend, we could see some real progress in one key area.

Jerome Powell’s comments a couple of months ago may have been the catalyst for the sell-off in stock markets – not to mention the rebound on Wednesday when he sought to clarify them – but it’s quite clear that Trump’s trade policies, particularly towards China, had already left markets on a rocky foundation.

Investors will be hoping that the two President’s, Trump and Xi, will be able and willing to make real progress in their trade dispute at the G20 meeting in Buenos Aires and avoid the need for further tariffs. Trump didn’t give us much cause for optimism on Thursday, claiming he wasn’t sure if he wanted one, although I think it’s safe to say this is likely nothing more than posturing ahead of their dinner on Saturday.

Survey weaknesses highlight need for a deal

The Chinese PMIs figures on Friday morning further highlighted the need for agreement between the two, with the manufacturing survey falling to 50, the level that separates growth and contraction, the lowest reading in more than two years.

The new orders component was of particular interest, weakening both domestically and externally, a reflection of the slowing economy and the impact of tariffs. At this stage, it’s a question of how much pain the Chinese administration is willing to accept, having so far been sheltered by the weaker currency and front running of orders ahead of tariffs being implemented. I feel this has some time to run yet, regardless of how positive the statements we get from the meeting on Saturday sound. The key giveaway will be whether the US follows through on hiking the tariff on the $200 billion of goods at the turn of the year.

Italy heading for EDP unless compromises found

In Europe, we continue to focus on the two big political issues that Brussels finds itself at the centre of. The battle between Rome and Brussels over the Italian budget for next year is progressing as expected, although reports of potential compromise from the former have encouraged investors in recent days as the country continues down the path towards an excessive deficit procedure.

May’s Brexit deal unlikely to get through parliament on 11 December

Brexit will dominate the headlines over the coming weeks though as Theresa May attempts to sell her deal to a government that appears united against it, for various reasons. The backstop is the most contentious issue of these which may stop her getting the necessary support on 11th December, opening the door to a variety of scenarios including heading to Brussels to have one last shot at getting the necessary concessions to get it over the line. The pound meanwhile continues to look weak and vulnerable and the prospect of a no deal Brexit becomes ever more real.