US President Donald Trump tweeted an encouraging report about trade talks with China just after the US stock market opening at 9:30 am, and risk markets soared. Trump wrote: “Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G20 in Japan. Our respective teams will begin talks prior to our meeting.”

At 9:50 am, FXI, the popular large-cap China ETF, was up 2.65%. The Dow Jones Industrial average rose 1.30%.

Risk hedges fell sharply. The 30-year US Treasury bond yield had fallen from 2.58% to 2.51% earlier in the morning, in response to the European Central Bank’s promise of more monetary ease to come, but it bounced back to 2.56% after the Trump tweet. The price of gold fell $10 to $1,344.

I continue to believe that Presidents Trump and Xi will reach an accommodation of some kind to mitigate the present trade war. The US president is polling weakly in key industrial and farm states in the Midwest. Trump can’t win reelection without repeating his sweep of the Upper Midwest, and the trade war has hit US manufacturing and agricultural particularly hard. Industrial production data have been consistently negative during the past several weeks. New York is the first of the regional Federal Reserve banks to report on June manufacturing activity, and the Empire State manufacturing index printed its biggest fall in history yesterday.

Trump likes to present himself as a rambunctious brawler, but he is also a canny and careful judge of popular sentiment. He kept his reality show Celebrity Apprentice on the air for a near-record 14 seasons by combing through weekly ratings data and taking preemptive action where required.

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Apart from the manufacturing worries of the Midwest, the White House has been bombarded with warnings from US technology companies about the dangerous of disruption of global supply chains. The world semiconductor industry is in a slump, and a protracted price war in computer chips would cripple some of America’s national champions in the sector.

China has managed to contain the damage to its manufacturing sector, whose May growth rate of 5% year-on-year was the lowest since 2002. Tax breaks and monetary stimulus have kept domestic demand strong enough to offset some of the impact of falling exports. Retail sales in May grew at a robust 8.6% year-on-year rate. Although China won’t collapse under trade war pressure, its economy has slowed and the long-term costs of stimulus are substantial.

The two sides have a strong incentive to reach an agreement, and I believe they will do so. I have recommended a “barbell” of safe US stocks (real estate, utilities, consumer staples) and Chinese stocks. Some Chinese-sensitive US stocks have outperformed today. The Philadelphia Semiconductor Index was up over 4% at 10 am, which is not a surprise; the sector is collateral damage in a trade war. If the trade war is resolved, look for beaten-up semiconductor names like Nvidia to outperform.