Despite the escalation in tensions between the US and China this summer and the hawkish soundbites coming from both capitals, we are still hopeful that we will see rational outcome in the near term. In particular, we could see a partial deal, with the trade portion of the negotiations (the backward-looking part) carved out from the technology issue (the forward-looking part). Indeed, it is in the interest of both parties that the trade talks make some ground, considering the global slowdown, the spike in CPI in China and the electoral calendar in the US. Also, recent weak data in the US could, on the margin, help soften the US’ stance somewhat.
However, many of the more challenging parts of the dispute between the US and China, including the technological and cultural rivalry, will remain unresolved, and if there is no appeasement in the tensions, there is a risk that the current commercial tensions could morph into financial sanctions, as rumours from the White House indicated late last month. This is a theme that we will continue to monitor very closely, as it would represent a significant escalation in global tensions and material risk for financial markets.
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