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Waiting for Godot – or maybe a trade truce

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As the half way point of 2019 is here, it is interesting to take stock of the year so far. Based mainly on a dovish pivot by the US central bank and the hope that China will reflate, investors have seen strong returns for the first half of the year across all asset classes. Most portfolios have done well and it has been right to be fully invested thus far.

This week however, nothing major has happened. Global stock markets are flat, bonds are flat, volatility and gold are flat and so is the dollar. The only thing worth noting is that the US semi-conductors index, the SOX index in market parlance, is up some 3% on the week. As this sector is the one most sensitive to the trade war, it appears the market is discounting that some sort of trade truce will emerge over the weekend between Trump and Xi.

Both presidents are under pressure from their domestic audiences. As mentioned last week, the most powerful business group in the US, the Chamber of Commerce, has urged the Trump administration to end its trade war with China.

On the other hand, a US based think tank of significant global standing hosted its first London dinner last night, to discuss the China-US relationship. Since the dinner took place under Chatham House rules, the identities of the attendees cannot be revealed nor can quotes be repeated. However, the key message one took away is that the public policy establishment really want Trump to take a hard line on China.

President Xi has a different problem and has to find a way to agree to a lot of what the Americans want without appearing weak in the eyes of fellow members of the Politburo Standing Committee, the committee consisting of the top leadership of the Communist Party of China, and indeed the nation at large.

For now, it looks like the U.S. will be willing to suspend proposed tariffs on an extra $300 billion of Chinese goods as they resume trade talks. Investors will know for sure by Saturday evening.

On the topic of the Conservative party leadership election, Boris Johnson is still the favourite and the bookmakers give him an 85% probability of becoming the next UK Prime Minister. There does appear to be room for manoeuvre in the political declaration on the UK’s future relationship with the EU. For example, were the political declaration to be aimed more squarely at a Canada-plus post-Brexit destination – so outside of the Single Market and outside of the Customs Union – then the Brexit deal as a whole may appeal to a greater number of Eurosceptic MP’s.

So although the likelihood of a no-deal Brexit has risen in recent months, many commentators still believe that a close variant of the current Brexit deal will eventually be ratified by a majority of MP’s in the House of Commons.