The upcoming 2020 U.S. presidential election makes de-escalation of the China/U.S. trade war more likely. But unpredictability on both sides combined with the damage already done keeps us cautious.
Waiting for the election pivot
The risks surrounding the trade war are at an inflection point, with much depending on the next moves by U.S. President Donald Trump and China President Xi Jinping. A return to Trump’s favorite maximum pressure tactics, or a refusal by Xi to make meaningful concessions, would reignite global recession fears. It may also be that Trump’s pivot is coming too late. The damage to business confidence and global supply chains may already have been done, meaning the inverted yield curve is correctly forecasting an impending recession.
The alternative scenario is that a trade-war retreat, coordinated global central bank easing and significant China policy stimulus sets the scene for stronger global growth in early 2020 and an extension of the equity bull market.
We like the logic of the positive scenario, but the downside risks are evident in global manufacturing data and the sustained U.S. yield curve inversion. Caution is still warranted as we move into the fourth quarter.
Paul Eitelman is concerned that further trade-war escalation could tip the balance toward U.S. recession. He thinks the U.S. Federal Reserve (the Fed) is focused on re-verting the yield, which implies at least one more rate cut this year.
The European Central Bank (ECB) fired its last substantial bullets with the September return to quantitative easing (QE) and extension of negative interest rates, says Andrew Pease. German car production is yet to recover, but credit growth is picking up across the eurozone. Europe remains either a significant winner from a trade-war resolution or a loser from an escalation.
Alex Cousley sees slowing economic indicators across the Asia-Pacific region, led by trade weakness. There is plenty of talk about China stimulus, but it is yet to show up in data releases. Equity market valuations are generally OK across the region and many central banks have eased policy. Trade-war developments and China policy remain the key watchpoints.
Van Luu likes the value offered by the GBP/USD exchange rate and sees plenty of upside if a no-deal Brexit is avoided. However, his favored currency remains the Japanese yen, which is still cheap and offers defensive diversification qualities.
The recession probabilities from Kara Ng’s U.S. business cycle index model have been hovering near the warning zone for a few months. Further Fed easing and improving macro and financial data could shift the model out of the danger zone in the next couple of months, but Kara’s bias is toward caution.