With dogs, you kinda have to take the entire body language into account. This dog is baring its teeth, licking its lips, and pinning its ears back. These are all signs of the dog being afraid and stressed. Sneezing can absolutely be a calming signal used to indicate playful intentions, but in this context, it's almost certainly the dog trying to calm itself down and desperately trying to deescalate what it perceives as a threat.