Presidents Trump and Xi agreed to a ceasefire in the US-China trade war; while existing tariffs on Chinese imports will remain in place, the outcome will be seen as positive for risk assets, the NZD and the AUD to start the week; 10 year US Treasury yield

At the G20 in Osaka over the weekend, Presidents Trump and Xi agreed to a ceasefire in the US-China trade war.  In an unexpected move, Trump also raised the possibility that US firms may be able to sell equipment to Huawei while negotiations are ongoing.  While existing tariffs on Chinese imports will remain in place, the outcome will be seen as positive for risk assets, the NZD and the AUD to start the week. 

After a meeting with President Xi that Trump described as “excellent”, Trump said the US would refrain from imposing tariffs on the remaining $300b of Chinese imports and the two sides would resume negotiations.  Existing tariffs on Chinese imports will remain in place and there didn’t appear to be any major breakthrough on the key structural issues underlying the trade conflict.  According to Trump, China had agreed to purchase large quantities of US agricultural goods as part of the ceasefire. 

The outcome is very similar to the truce struck after the meeting between the two leaders in Buenos Aires in November, and appears to be broadly in-line with consensus expectations.  That truce unravelled in May, as China allegedly backtracked on previous US demands and negotiations collapsed, leading Trump to impose 25% tariffs on $200b of Chinese imports.  The threat of future tariffs and escalation remains (especially given the differences between the two sides on several key issues), but markets are likely to be relieved that the worst-case outcome – new tariffs on the remaining $300b of Chinese imports – has been averted for now. 

Trump also raised the possibility that US firms could continue selling equipment to Chinese telecommunications firm Huawei while negotiations take place, in what is likely to be seen as a positive development.  While acknowledging that Huawei presented a number of difficult issues that he didn’t expect to be resolved until the end of the negotiations, Trump said he thought it was “OK, that we will keep selling that product” to the firm in the meantime.  He said he would discuss whether Huawei should be removed from the Commerce department’s so-called ‘Entity list’, which places restrictions on US firms supplying equipment, in the coming days. Overnight, however, White House economic advisor Larry Kudlow cautioned that Trump wasn’t planning a “general amnesty” on Huawei and that export controls would remain in place for goods considered sensitive to national security.  

So while the underlying issues remain unresolved, and trade tensions are likely to remain a feature of the landscape for some time, the Trump-Xi meeting was, realistically, about as good as the market could have been hoped for.  Risk asset markets should open positively to start the week, global rates and equities should increase, and the NZD and AUD should open higher. 

Friday’s session saw limited moves across currencies, bonds and equities as market participants awaited the Trump-Xi meeting at the G20.  The S&P500 closed up 0.6%, to end the first half of the year 17.3% higher, its best first-half performance since 1997.  Financials led gains on the S&P500 (+1.4%) as the investors reacted to several major US banks announcing higher dividends and share buybacks, after passing the Fed’s annual stress test exercise (Credit Suisse’s US unit was the only bank found to have problems).  Goldman increased its dividend by 50% while JP Morgan increased its dividend by 13%, and both banks increased their buyback programmes for the forthcoming financial year. 

The 10 year US Treasury yield was little changed on Friday, as it continued to hover around 2%. The G20 ceasefire is likely to see an increase in US and global rates, and a steepening of curves, although market expectations of Fed rate cuts are unlikely to shift significantly.  The market is still likely to expect a Fed rate cut later this month, although expectations of a 50bp cut may be pared back (there were 33bps priced-in for the July meeting as on Friday night’s close). 

G10 currency movements were limited on Friday and contained to within +/-0.3% against the USD.  The NZD was the top performing currency, up 0.27% to 0.6718, its highest level since mid-April, and it’s likely to move higher again when trading opens this morning.  The USD indices were little changed on Friday and are sitting towards the lower-end of recent trading ranges.  The Trump-Xi ceasefire should be USD-negative given it is likely to boost risk appetite (which, generally, has a negative correlation with the USD) but unlikely to dissuade the Fed from cutting rates. 

In economic data, the Chicago PMI was weaker than expected and fell into contractionary territory at 49.7.  While the ongoing issues at Boeing might have contributed to the weakness in the Chicago PMI (where the firm is headquartered), the survey reported that 80% of firms had been negatively impacted by tariffs, underlining broader business concern about the US trade policy.  The subdued readings of regional manufacturing surveys in June point to downside risks to the closely followed ISM manufacturing survey tonight.  The Fed’s preferred measure of inflation, the core PCE deflator, was a tenth higher than expected at 1.6%, due to revisions to past data.  Meanwhile, the Dallas Fed trimmed mean measure of PCE inflation stayed at 2%, although Fed officials appear to have gone quiet on this alternative measure of core inflation as they prepare to cut rates.  In Europe, core inflation was also a tenth higher than expected but, at 1.1%, it remains substantially below the ECB’s target and markets expect the ECB to announce new easing measures in the coming months.  The Chinese PMIs released on Sunday were close to market expectations, with the manufacturing index remaining below the key 50 level but the non-manufacturing index at a more healthy 54.2. 

Finally, on the side-lines of the G20, Russia and Saudi Arabia agreed to extend oil production cuts for another six to nine months.  OPEC+ formally meets this week in Vienna, but the decision to extend supply cuts now appears to be a formality.  The supply agreement should provide a further boost to oil prices, in addition to the likely increase in broader risk appetite from the G20. 

There is plenty for the market to focus on the in the session ahead.  The Caixin version of China’s manufacturing PMI is released this afternoon, influential Fed vice-Chair Clarida speaks on monetary policy this evening, and the final versions of the European PMIs and the ISM manufacturing survey are released this evening.