The upcoming meeting in Washington between US President Trump and Chinese President Xi on September 24th has captivated global financial markets. From a market perspective, the focus isn't primarily on the specifics of any potential agreements, but rather on the leverage each leader brings to the negotiating table.
President Xi of China appears to enter these discussions from a position of relative strength. China's robust export performance has largely mitigated the impact of the ongoing trade dispute, with its global trade surplus projected to exceed $1 trillion for the second consecutive year. Furthermore, Beijing has subtly asserted its own influence through its control over rare earth minerals, a sector critical to American manufacturers. Conversely, President Trump holds strong cards with tariffs, semiconductor restrictions, and control over access to the US market. However, there's a discernible urgency on his side, intensified by the looming November midterm elections. With his approval ratings at 35% in recent polls and Republicans trailing Democrats on the congressional ballot, compounded by the economic repercussions of the Iran conflict and rising fuel costs, Trump has a clear motivation to secure a perceived economic victory from the summit.
Considering these dynamics, market participants should anticipate that the most pragmatic resolution will likely involve a continuation of the existing trade truce, rather than a sweeping new trade deal. While Beijing may offer symbolic commitments, such as increased purchases of US agricultural products, aircraft, or energy, and possibly enhanced access to rare earths, these will likely serve as conciliatory gestures to maintain the current equilibrium. Beyond trade, discussions are expected to touch upon issues like artificial intelligence, Taiwan, fentanyl, and Iran. However, for the markets, trade remains the most direct and influential factor. A prolonged truce would primarily alleviate a significant tail risk for global growth, setting a relatively low bar for success in the eyes of investors. This scenario suggests that equities and risk-sensitive Asian currencies may find continued support, though a substantial and widespread market rally is improbable.
Ultimately, the objective for markets is not for the US and China to entirely resolve their complex relationship this week. Instead, the critical need is for both nations to prevent further deterioration of the precarious stability that currently exists, ensuring that the foundational elements holding their relationship together are not fractured.