The stage is set in Buenos Aires for a performance of warm smiles and hearty handshakes between the presidents of the US and China at the G20 meeting next week.
But investors expect there will be a different dynamic playing out behind the scenes, based on months of tension over power and trade between Donald Trump and Xi Jinping.
During a year in which trade spats have become increasingly fraught, investors have suffered from rising uncertainty and a turbulent ride in global markets.
Chinese stocks have plunged 27 per cent since their peak this year in January, making China the worst-performing major equity market in 2018. The largest technology stocks in the US, meanwhile, have tumbled into a bear market with more than $1tn wiped off their value.
All eyes are now on the G20 gathering at the end of November, to see whether the trade impasse will be resolved, paused, or escalated. Combined with rising interest rates, clouds over global economic growth and political tension elsewhere, investors are awaiting the meeting with a degree of trepidation.
The US has this year announced three rounds of tariffs on China, amounting to levies on about $250bn worth of goods, while China has retaliated with tariffs on $50bn of US products and plans for a further $60bn.
Mr Trump’s 10 per cent tariff on $200bn of Chinese products is set to jump to 25 per cent in the new year, unless a deal is struck in the coming weeks.
“The meeting of the two presidents is increasingly seen as an important opportunity to break a negative spiral in financial markets,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
“Although full agreement or complete resolution is seen as rather unlikely on all the issues — trade, technology, intellectual property, security . . . even a temporary ceasefire — an agreement to keep talking and sort out some of the easier issues — would help calm market nerves.”
Investors are trying to see past the steady stream of accusations of predatory trade practices being unleashed by the two superpowers. On Tuesday night, the Trump administration said China had taken “further unreasonable actions in recent months” in terms of intellectual property.
Any ceasefire, along with signs of an upturn in global activity, could prompt investors to invest cash that they have sitting on the sidelines, fuelling a year-end rally.
But if the two presidents cannot agree or “even deliberately find areas of disagreement in order to give messages to their domestic audiences”, then Mr Milligan said many investors would stick with a much more defensive stance, such as holding cash. “Cash levels are above average but not very high in fund manager portfolios,” he added.
Optimism that a resolution could be struck at the G20 meeting was tempered by the recent Asia-Pacific Economic Cooperation summit. For the first time in its three-decade history, the meeting failed to issue a joint communiqué, while Mr Xi and Mike Pence, US vice-president, clashed over trade and security.
Tai Hui, chief market strategist for Asia-Pacific at JPMorgan Asset Management, said the Apec meeting revealed significant differences between Washington and Beijing on trade issues, meaning a “material breakthrough” on tension was “highly unlikely”.
The most likely outcome of the G20, he said, was that China and Washington would maintain an open dialogue even if the leaders “agree to disagree”, which the market would receive as “a mild positive” in spite of the tariff increase set to take effect next year.
Although bankers are forecasting a range of potential scenarios at the G20 meeting and over the next few months, some think a “pause” in the trade spat is the most likely result.
Analysts at Goldman Sachs forecast just a 10 per cent probability of a comprehensive deal and a rollback of tariffs in the next few months, and expect a 40 per chance of a “pause” over this time, to allow for further discussions.
Meredith Pickett, a strategist at Morgan Stanley, and her team said that while a “constructive US-China statement or a tariff pause are rising possibilities” at the G20, she still expected further escalation before an endgame became possible.
She said the base case was for trade tension to escalate until substantial market or economic weakness caused China or the US to take action. “This appears to us to be what’s happened over the past few weeks,” she said, noting that the phone call between Mr Trump and Mr Xi in early November, and the move by the US to sign off on waivers for Iran oil sanctions, came after the S&P dropped by more than 10 per cent from its year-to-date highs.
But uncertainty caused by the trade impasse among other factors has spooked investors, leading them to take profits in sectors such as technology which have rocketed over the past decade.
Oliver Jones, of Capital Economics, said that technology is “among the most vulnerable” to a further escalation of the US-China trade war and is susceptible to weakness in the Chinese and US economies. Other issues have weighed on the sector of late, including concern over demand for Apple’s iPhones, and an investigation by Chinese authorities into memory chipmakers.
“We are sticking to our view that the equities of IT firms will be among the worst performers as stock markets around the world fall much further between now and the end of next year,” he added.