Looking ahead to the G20 in Japan LSE

Thursday, 27th June 2019 11:48 - by Shant

By far and away, the G20 meeting this weekend is one of the key moments we are likely to have this year.  Although the stakes are high, the chances that the US and China - whose respective leaders will meet on Saturday - will come up with an ultimate deal look highly unlikely. 

China's economy is losing pace and president Xi is under pressure to maintain its trade advantage, while the US president is entering the election race for 2020 and will be looking to positive results to back his candidacy for a second term.  Both sides will be reluctant to give up much ground, so the odds are heavily skewed against a resolution this weekend.  

However, fears that there will be a complete breakdown in the relationship between the two superpowers may also ease a little, with domestic pressure against the White House administration in imposing tariffs on another $300bln of Chinese goods.  Some 600 companies have canvassed against taking such action as this will hurt businesses at home and undermine profitability - which is the underlying reason behind taking a tough stance on unfair global trading practices.  In short, the objectives have firm backing, but the bombastic and aggressive methodology does not.  

Based on the G20 meeting in Buenos Aires last year, another truce looks the likely outcome, with the familiar back-patting expected and accompanied by an agreement to keep talks ongoing.  Indeed, the South China Morning Post suggested that as part of the agreement for president Xi to attend this weekend's communique, a freezing of tariffs was agreed on behalf of the US.  This is likely to see a modest relief in risk sentiment, with Asian markets on Sunday night the first to react to weekend events. 

However, there is another proviso in this.  There is also a major potential headwinds for risk bulls in the form of the US spat with Iran.  President Trump will be looking for allies to back up his sanctions on the Republic, and here, China's commercial interests are likely to be tested given its growing share of exports into Iran and its reliance on its oil.  Beijing has warned against opening a Pandora's box if the US decides to implement air strikes on Iran, so allegiances will be severely tested and especially so if the US president adopts a combative stance on Iran this weekend.  

President Trump himself will also be under scrutiny (as ever) - especially in the wake of his interview with Fox news this week.  One of his more incendiary comments was aimed at Japan - this weekend's hosts - saying he US-Japan defence alliance was lop-sided and that Japan would only 'watch on a Sony television if the US came under attack.  Not exactly diplomatic language before such a key even, yet unsurprising from this particular president. Trump has also aimed criticism towards Europe and India, with the former accused of targeting US tech companies while India was pulled up on implementing retaliatory tariffs to Washington's revocation of special trade privileges. 

As such, equity markets will be on edge going into the weekend, and there is much to ponder, and more so with the major indices on Wall Street still flirting with record highs.  There is however somewhat of an insurance policy in place, however - the Fed.  As we heard last week, the central bank is ready to 'step in' if global risks pick up and while the rhetoric may seem vague to some, it is in direct reference to the trade policy pursued by the Trump team.  Even so, reliance on easier financial conditions shows a degree of complacency, especially with the real economy in the US warranting only a modest cut in rates.  The fact remains that for as long as the trade war continues global activity - and more importantly demand - is likely to suffer.  In this instance, lower rates may have far less of a positive impact than is perceived.   This G20 meeting has the potential to show us just how much.