Ahead of this week’s meeting between President Donald Trump and President Xi Jinping at the G20 summit, news reports suggest the US may be willing to accept a ceasefire in the US-China trade dispute, suspend the next round of tariffs on Chinese imports, and continue negotiations. On Wednesday, US Treasury Secretary Steven Mnuchin said that a deal was 90% agreed.

While predicting political decisions is very difficult, and the detail of the last 10% could be a stumbling block, the latest reports are in line with our view that a prolonged ceasefire is the most likely result from the G20 meeting. But the outcome is finely balanced between the different possible scenarios:

* Base case (50% probability): Prolonged ceasefire. In our base case Presidents Xi and Trump agree to a ceasefire and ongoing negotiations, with neither an unwinding nor an escalation of existing tariffs. President Trump temporarily drops the threat of tariffs on the remaining USD 300bn of Chinese imports, conscious of their negative impact on US growth. To bring China back to the negotiating table, some US concessions on Huawei may be needed – such as a continued suspension of the ban for the duration of the truce.

* Downside case (35% probability): Tariff escalation. In our risk case, President Trump implements tariffs on most of the remaining Chinese products shortly after the G20 meeting. Negotiations would likely pause for some time and resume only when the growth outlook for both countries worsens considerably. We estimate that a broadening of the scope of tariffs could subtract roughly 1 percentage point from both US and Chinese GDP growth.

* Upside case (15% probability): De-escalation after G20. In our view, the broadening of the dispute into technology and the heated rhetoric from both sides since tensions escalated in early May has reduced the chances of a US-China trade deal shortly after the G20 meeting. A quick resolution would require Washington and Beijing to compromise on parts of their trade objectives, making Presidents Xi and Trump vulnerable to domestic criticism.

In our base case scenario, over a six month horizon, we would expect US equities to trade in a range of 0 to +5% from current levels and Chinese equities in a to 12-month tactical positioning continues to overweight equities with a regionally selective approach. In the near term, given downside risks, we would also recommend countercyclical positions.