Why the Trump-Xi summit matters

(upbeat music) - Great Check, where macro meets markets, a podcast from Deutsche Bank Research. - Hello and welcome to Great Check, a podcast from Deutsche Bank Research. I'm Shra's Gopal, FX Strategist, and I'm joined as always by my co-host and macro strategist, Henry Allen. Welcome Henry. - Good to be here, Shra's. - And on this exciting episode, we're joined here in London by our head of Symmia and FX Research Oliver Harvey, hello Ollie. - Very good morning. - And we're delighted to be joined on the line by our global head of emerging market research, Symmia Gulp. Hello Symmia. - Morning Judgment. - So we're recording on Wednesday, the 13th of May. I think there's lots to dig into in markets, and the focus of this podcast will largely center around the Trump G Summit and emerging markets. Here in Europe, we've had lots of speculation about resignations from European leaders and they're saying that they will not do so, but that's more than enough already about the Real Madrid president. Henry, you've been in traveling to see clients in Switzerland, I believe, or the past couple of days. What has been top of mind with regards to to markets? - Sure, so the Middle East still remains top of mind in terms of what people are thinking about. That is still the dominant theme right now. And of course, in the last week, the new slow around a potential reopening of the tradeable mooses become decidedly more negative. So last week, there were hopes that some kind of deal might be reached the reports that the US had sent a one-page memo to Iran, but Trump has since said that their response was in his words totally unacceptable. And then on Monday, he was saying that the ceasefire this currently in place was on life support. So that's meant oil prices have crept up again. They're remaining about $100 a barrel. And we've also seen longer data government bond yields also move higher in several countries. Another theme in the last week is we've had some quite interesting US data. We've had both the job report and the CPI print. The job support was actually very strong. We had a second month in a row above 100,000 for payrolls, indeed, on the current state of revisions. It's the first time since 2024, we've had back to back months with payrolls above 100,000. But then yesterday, we then had the CPI print, which was a bit stronger than expected if anything, headlined CPI up to 3.8% of the strongest since May 2023, back when the Fed was still hiking rates. So for the Fed with Kevin Moore shortly, looking like he's going to become the new chair. Actually, this is putting them more focus on the inflation side of their mandate, rather than the labor market side of their mandate that looks pretty strong. So from a market point of view, you'll see market pricing of the Fed become a little more hawkish in the last week or so. And of course, this week, as you mentioned, we've then got more geopolitical headlines because this Trump G summit is taking place in Beijing. Yes, indeed. Quickly before we move on to that, I have to give a shout out to Justin Widener in the DB, USE con team who absolutely nailed the core inflation reading for for the last month. And indeed, that was the first upside surprise we've had in core inflation across G10 since the start of the conflict and notable development there. So focus very much on the Trump G meeting as Henry alluded to. That's a great opportunity to bring in some here. There's a lot of anticipation around this meeting, which was pushed back and is now taking place, read that we're going to have one bank with two meetings and the visits of the Temple of Heaven. But what should investors be focused on and what are your expectations for this widely anticipated summit? Thanks, Chris. Yes, even as the record does, I believe President Trump is on a flight to Beijing. I look at this is, to my mind, without doubt the world's most important bilateral relationship. So even just as a point to begin with, I think having stability, predictability, guardrails, and I would say probably most importantly, communication in this relationship is critical not just to these two countries, but for global macro as a whole. The fact that this summit is going ahead, to me is in itself a proof of success. For the US, I'd say it shows that the success in leveling world they have been arguing for a while has been an unfair playing field. For China, it is a big recognition of the enhanced global standing and the success they've had in standing up to the efforts of Trump administration to pressurize it with tariffs through much of the last few months. And remember one thing, this is meant to be the first of three, maybe even four, if they can really push it, of meetings this year, including another bilateral summit which is expected in the US in the fall. To a question, I'd say my base case would be that the bilateral engagement itself, and I think those are fairly well-known topics and issues, trade, technology, export controls, I think they'd center around limited, but potentially more achievable, more durable, deliverables. So for example, you've got commitments in China to buy boi jets, pretty sure you'll get something about them buying US soybeans. I think US in turn will probably ease some export controls, especially on chips, we'd probably see announcements on a board of trade to be set up to increase bilateral trade in nonsense to various, just to be sure, a lot of this is rebranding of existing efforts. What would be interesting, of course, is to see if any headways made on Chinese commitments to supply more rare earth, what is said about investment deals, there was a board of investment which was proposed. Now, I think any agreement on investments has got a higher hurdle, a steeper hurdle, compared with that on a trade because of national security issues. So let's see where we get out of that. But again, away from this bilateral engagement, if you might, I think it's whether these two leaders can actually reaffirm some guardrails around major geopolitical issues, which will be a lot more interesting, certainly to markets at this point in time. Now, these are very complex issues, whether it's around what's happening in the Middle East, what's happening in Ukraine, of course, cross-states, even North Korea. I know that's been off the agenda for a while. So it's unlikely that you will again get any major concessions on either sides. But remember, these are two key nodes in this emerging multiple world. So whether they actually agree to agree or disagree will itself become fairly, fairly important. The elephant in the womb, of course, being Middle East, I'd say China finds itself in a position of significant leverage at this point, both in terms of its capacity to influence the net global saving shortage or global supply shortage, I should say, by removing its own import demand from the equation on oil, given it's got significant reserves, given it's got a much more very diversified energy mix than on most of the economies. But second, also, as a gambitour of sorts, to help bridge this deficit of trust between the stakeholders in the Iran conflict. So yes, a lot at stake over the next couple of days, Chris. Thanks, Samir. And given your comments on the Middle East, that seems like a good opportunity to bring in our Samir head Oli Harvey. I'm going to say on economic consequence of what's going on right now, I think in some of those EM regions. Yeah. And of course, I think another thing the market will be watching pretty closely after this as he-- Trump meeting is potentially the ramifications on the relationship or on the ceasefire in Iran, because I think one of the big takeaways that we'll be living with over coming years and decades is China's influence in that region is going to be materially enhanced. There is an argument that the ceasefire has sort of been kept bubbling along, even if we haven't had a straits of hallmuse reopening until we get obviously this crucial summit between the Zian Trump. But I think in terms of EM macro, look that it actually hasn't been that bad so far. I say that with the obvious benchmark being 2022, which has the last very large sort of global energy supply shock. And you can kind of measure that because it sort of happened more or less at the same time of year. So you can benchmark different economic variables like inflation expectations and the PMIs and actually the PMIs, I think you alluded to earlier, Henry in the US, have been a lot better than one would have expected at this junction, given the magnitude of the move in oil prices. So I think the starting point for emerging markets is a lot better than it was in 2022. Policy has been pretty sensible, real rates, pretty high, and inflation was quite contained. The risk though is. is if oil remains at these sorts of levels for the next two to three months, the effect on economies in EM could become quite non-linear. The reason I say that is emerging markets, including the ones that Simea looks at in Asia space, are big energy importers, but they're also in Asia, certainly big food importers. One of the risks, I think, is you have very high fertilizer prices. Obviously fuel is an input into farming, but so is things like Ureia, and Ureia, I think 35% of the world's supply of Ureia goes through the strengths of all these. So that effectively has been cut off. So the longer this goes on for, the more the risk is this affects next year's growing season. And if that happens, you sort of lock in a pretty non-linear effect on food prices, which obviously has a big impact on inflation. And then maybe another thing to consider sitting here in London, actually the UK is also a very big exporter of transportation, but jet fuel prices. There's a big shortage here in the UK, we're importing a lot of US jet fuel at the moment. The longer that goes on for, obviously, it's going to affect our holidays, which is annoying, but for emerging markets that are quite dependent on tourism revenues. And my region, that would be places like Egypt, Turkey, I think in, you know, Simea's region, Thailand, that could have a pretty important effect as well. So I think the bottom line is, we're not panicking at the moment, but if these straits don't reopen in the next two to three months, then it's going to get increasingly difficult. I agree with Ollie's point. I think one thing if I might to add to what Ollie was saying, I think within the broader emerging markets construct. And I don't, to that matter as to how Asia, I feel is sort of fairly different from every other geography, is that while this is very obviously an energy shock, which matters to the world, but for a large part of the world, this is ultimately still a price shock, because oil's a globally traded commodity, and to the extent that there is lesser of that available, it reflects itself in price. For Asia, and I think that's where the key differences and why Asia is already parts of it in an emergency mode, is because for Asia, it's also potentially a quantity shock, and which makes policy calculations far more tricky here. It's not just about the price at which it will be available. It is increasingly about whether any oil, and then of course, for the down the supply, J-Lonlidge distilates, and like Ollie was talking about, for Eliza, etc. Will they be available at all? And the impact it has potentially on demanding growth, much more, or at least as significantly, as the impact from price. - Yes indeed, that's fascinating, Samir. On the topic of Asia specifically, how are some of these countries looking to China, both from the channel of the RMB acting as an anchor, and the ongoing internationalization process, there's underway there, and clearly having an impact on the broader dollar, but also specifically with regards to energy supply chains as well. - China is a key part of the translation of any global risk to Asia. It's very important to supply chains, it's very important to the demand function, and by that I mean not just about goods, but also services, and it's actually even important now in terms of investment dollars that come to the region. Now in this particular instance, as we face this energy by shock, China, and after the concerns over the last few years, we have had from trade wars and then the pandemic, I think China again finds itself in a potential anchor role for the region. And I'd say two or three important manners. One, by a policy priority for internationalization of the RMB, given the region then gets an opportunity to diversify some of its exposure away from the dollar rails, helping support liquidity, broadening out the funding options Asia has to be on just the developed market currencies. Two, why the investment China has made in its clean energy supply chains, and which could help the region systematically reduce its vulnerability to energy shocks in the future. And then of course, what is probably closes to the heart of financial markets through a steady policy hand that China has shown. Now whether that is in the fall of the currency, which continues to do well versus the dollar, but also in terms of underwriting growth, which can ultimately be an important factor in mitigating some of the satflationary pressures, the rest of the region is facing. Now, I of course don't want to portray this all as just a positive risk. There are the negative side to this picture as well. China still has significant over capacity. And we know that it continues to export that to much of the region. And that is a threat ultimately to the industry, and development for a lot of the economies in the region, especially if it comes without due transfer of technology, due externalities into these various economies. The second risk I'd highlight, and this is going back now to the fact that we've got this big summit this week, there's always the risk for the region that it gets excluded from crucial decisions, which are taken by Washington and Beijing on issues like the South China Sea, the East China Sea, ASEAN, et cetera. And they don't get a seat in that decision. It's was interested to me, but President Trump seems to have already broken precedence of sorts by putting on scenes to Taiwan on the table for a discussion when he meets with presidency this week. - So on that topic of defense, I know all of this is something useful, no difference as well. A lot of countries increasing defense spending right now, thoughts on what that means, not just politically, but also in terms of the impact on the dollar, other regional dynamics, you know that. - Yeah, thanks, Henry. So I mean, we've been talking so far in this podcast about some of the shorter term implications or medium term implications from this conflict. But of course, you know, this is, I think it's fair to say, gonna have some very meaningful longer term implications. And defense spending is very interesting. We've been writing a lot about the term that not just ourselves, but others using geo-economics, which sounds, you know, very fancy, but really all it means is foreign policy and economic policy are becoming increasingly intertwined. Now, part of that is defense spending, as you said. And I think what this conflict will serve to do is reinforce an existing trend, which started obviously with Russia's invasion of Ukraine and the big announcements from Germany. We got last year on defense. I think perhaps could continue post the election in Japan when the LDP got a very big majority on a very hawkish foreign policy platform. I'm sure to some ears point. If indeed, arms exports to Taiwan are on the agenda, that could serve as an impetus to Taiwan defense spending and in the Middle East, you know, that idea of the US security umbrella, I think, is beginning to shift. Now, what we did in this report, it's just look at periods where you've had rapid realignment and typically what you see in those periods from an economic perspective, it's quite investment-intensive. And investment picks up consumption, which is the other part of the National Accounts Identity doesn't decline to offset it and so savings rates fall. So basically, it's a drain on global savings. Now, setter is parabas, falling global savings has an obvious implication for global interest rates, which is that they should be higher, because that's a big input into those models. Now, from an FX perspective, I think it's interesting and I don't think this is a tradable opportunity in the next month or two, but it's certainly something that investors should consider on a more medium term horizon. If you look at the three big regions where you arguably have the biggest impetus to increase defense spending, they are Europe and Germany, Europe as a whole, East Asia and the Middle East. If you look at the three regions globally, which contribute the most to global savings, it is Europe, East Asia and the Middle East. And if you look at where they savings have typically gone, who are the three biggest holders of US assets, can somebody finish the trifecta for me? I'm going to guess is Europe, East Asia and the Middle East. Excellent. Excellent. So at a very honest serious note, I think there may be a degree of incompatibility between recycling these large private savings from those three regions, at least in the same extent that we have seen over the last two decades. And these needs for higher defense spending, which needs to be financed. And of course, it's not just defense spending. also take you know auto autonomy and technology, autonomy and energy. These are quite investment-intensive areas where the world has sort of relied on either the US picking up the bill for it or a very open environment, which I think is changing now. So I think that could have very meaningful implications for financing the US deficit and therefore, of course, the dollar. - Thanks, Oli. I'm glad you mentioned Europe since we hadn't spoken too much about it. In terms of Europe's role in this and another topic that you've been writing about in extensive detail, the Hungary election and the implications of that have been top of mind in your region. Is there a wider read across from the results in terms of European cohesion? Or should this be seen solely as an interesting idiosyncratic story in Hungary? - Oh, I think that definitely is. I mean, Hungary has been a, the relationship between former Prime Minister Orban and the EU had been in sort of terminal decline is how I would characterize it. And there have been many sort of turning points over the last two decades, but most recently Hungary's opposition to EU funding for Ukraine, Hungary's opposition to Ukraine's EU accession. These are very, very important issues and I think that will change. So from a European cohesion perspective, there is an important read across. It will make life a lot easier in Brussels. And then of course for Hungary, I mean, the thing that we've been writing about is a potential for another Euro member state because that was of course in the manifesto of the incoming party, teaser party. And now they have such a big majority, they can make it happen. And obviously it's gonna be difficult because they have physical problems, et cetera, et cetera. But it's a real opportunity, which I think in the long term will be very positive for Hungary and I think to your point. It does matter for Europe, yeah. - Well, thank you very much for joining us. Thank you, Samir. - Thanks guys. Thank you. - And thank you, Rajoli. - Pleasure. - Thanks. - So Shreya, so what should we be keeping in line in the week ahead? - Yes, actually somewhat of a quiet a couple of weeks ahead compared to certainly the raft of data that we've had, the raft of central banks that we've discussed in previous episodes. Perhaps the Nvidia earnings and maybe the highlights on the calendar again linking to some of the topics we've discussed and the CEO also making his way to China as we speak. Those earnings will probably be in focus and the spillovers to some of the FX complex from any impact on the S&P. And elsewhere, I know we've talked about it a little bit at the start, but I do think that these continued headlines around political developments have the potential to continue to cause a little bit of volatility in UK assets. I would broadly say that certainly from an FX perspective, the moves have been very, very small and ranges have remained quite well contained, but on the guilt side to a point you made at the start, we ask continuing to see those longer and the yields make new highs. But otherwise, yeah, very much looking forward to coming back in a couple of weeks' time. - Thanks, Shreya. Thanks all for joining us next time. - This is Rate Check, where macro meets markets, a podcast from Deutsche Bank Research, to ensure you never miss an episode, and you're not subscribed now. - Thanks a lot.