We still think a mini trade deal between the United States and China could be reached in November, when the APEC summit will take place. This does not mean that trade tensions will disappear overnight, and that global trade will escape from recession. Indeed, the risk is elevated that the Trump administration will turn to Europe and has a more radical approach to force Europeans to make trade concessions. Nonetheless, such a mini deal could temporarily have a positive effect on confidence and growth momentum, and it could give a boost to emerging countries that are among the most dependent on manufacturing to growth, especially in Southeast Asia.
If a currency pact is also part of the mini deal, and that the CNY remains stable, as it has been for several months, it could also push the Dollar Index lower, which would be another reason to be positive on EMs.
The USD has likely reached its cyclical top
The rise of the USD since April 2018 has been one of the most important drivers of asset performance over the past 18 months and has played a key role in EMs performance along with trade war tensions. The stronger Dollar Index has resulted from risk aversion but, foremost, from lower US dollar liquidity in the international financial system.