The trade rhetoric rollercoaster rumbles on. A tweet from CNBC’s Beijing Bureau Chief, citing government sources, claimed “Trump said no tariff rollback,” and suggested China’s strategy would now be to wait out US elections and impeachment proceedings. Headlines on Huawei were more supportive, with the Trump administration announcing a fresh 90-day extension to waivers allowing US firms to continue doing business with the firm. And elsewhere, Japan's lower house of parliament has approved the limited trade deal Prime Minister Shinzo Abe agreed with the US.

But, while the rhetoric can be contradictory and confusing, overall we believe that the US and China are making progress toward finalizing an interim deal:

* In our base case (60% chance) we now see the US and China agreeing a Phase 1 deal that, at a minimum, averts additional tariffs. The initial agreement would likely include a resolution of less critical issues such as China's purchases of US agricultural products and opening up of its financial services sector, as well as improving the transparency of its currency regime. We expect the more difficult structural issues, such as cybertheft and industrial subsidies, to be left for later phases. Our expected range for global equities in this scenario is for 0-5% upside from current levels.

* Our downside scenario (20% chance) is for a renewed breakdown in trade talks with fresh tariff increases, including the 15 December scheduled hike. This could happen, for example, if President Donald Trump becomes less convinced of Beijing's commitments, such as increasing China's purchases of US products. In this scenario, with rising risks of additional trade sanctions, we would expect global equities to fall 15–20% as escalation further impaired business sentiment and started to dent consumer confidence.

* In our upside scenario (20% chance) trade talk momentum builds, tariffs are removed, and both sides quickly resolve core structural issues such as forced technology transfer and Chinese subsidies. Our upside scenario could materialize if, for example, Presidents Trump and Xi become increasingly worried about the status of their economies. If the US and China are able to quickly agree on a meaningful rollback of tariffs global equities could return between 5% and 10%.

Given lower risks of a further breakdown in trade negotiations ahead of the US election, we now hold an overall neutral stance toward equities. With the longer-term trade issues likely to remain, we prefer stock markets with a higher proportion of domestically generated revenues and a larger consumer relative to business exposure, and so we prefer US to Eurozone equities.