G-20 Trade Meeting Update

From the G-20 meeting, Russia signaled there will be no further oil output cuts, although this could change at the upcoming OPEC meeting.

President Trump said he will begin the process for withdrawing from NAFTA, leaving Congress with the choice to approve the new USMCA or have no North American trade agreement.

The dinner between President’s Trump and Xi appears to have gone well, but it looks like China was the clear winner. President Trump decided to postpone increasing tariffs on January 1st from 10% to 25% on $200 billion of Chinese goods until March 1st.

This postponement is on the expectation that China will purchase a “substantial amount of agricultural, energy, industrial and other product(s)” from the United States. According to representatives from China, China will purchase more goods from the U.S. based on the needs of the Chinese people. No amount or timeline was given by the Chinese.

Both sides agreed to keep communications open with the goal to completely remove all tariffs. Only the Trump Administration is placing a 60-day timeline on progress.

In my opinion, China is the clear winner of this meeting. They managed to get President Trump to grant them a 60-day extension from additional tariffs without committing to any changes. Based on my understanding of how the Chinese negotiate, they will either make token purchases to see if it will appease the Trump Administration, or they will do nothing until the 60 days has passed, at which time they will then attempt to renegotiate.

While it’s hard to say how the stock market will react since nothing has structurally changed outside of a 60-day moratorium, the next resistance level for the S&P 500 is at 2,815, will support is at 2,600. Any rallies are likely to be short-lived.

The real headwind for the equity markets is the Fed, who is continuing to tighten monetary policy. Anyone who understands the effects of tighter monetary policy knows that it’s only a matter of time before the U.S. stock market falls. Since President Trump has tied the success of his presidency to the stock market, any further drop in equity prices is likely to cause him to back off his spat with China.

China knows this, which is why they need to continue buying time until the inevitable tightening cycle causes U.S. stock prices to catch down with the rest of the world. This is why China can walk away from this dinner as the victor without making any purchases of U.S. goods.