Donald Trump is reportedly anxious to reach a comprehensive and lasting trade deal with Beijing amid ongoing turmoil in US equity markets.
That’s according to the ubiquitous “people familiar with internal White House” discussions cited by Bloomberg in a piece out late Tuesday.
There’s more than a little irony in the fact that equity market volatility is forcing Trump to push for a quick deal. After all, the President repeatedly claimed the 2018 selloff in Chinese equities would ultimately force Beijing to relent.
Critics of that contention variously argued that China could afford to play the long game for a variety of reasons, not the least of which was that Xi Jinping doesn’t have the same political calculus as Trump. “After consolidating power at the 13th National Congress, Xi does not need to worry about midterms or his own re-election”, BofAML’s Ethan Harris wrote in August. “Hence he likely does not worry about the stock market as much as a US president.”
Further, China has myriad policy levers, both fiscal and monetary, they can pull to cushion the blow from the trade war. While smart people can (and do) argue about the relative merits of pulling those levers and also about the extent to which those levers are actually effective once pulled, political constraints do not apply the same way they do in the U.S.
Finally, it has been abundantly clear for quite a while that once the effects of Trump’s fiscal stimulus wore off, the U.S. economy and U.S. equities would be exposed to the deleterious effects of the trade frictions. The chickens are now coming home to roost, with Apple’s guidance cut being perhaps the most poignant example.
When you throw in Fed tightening, you end up with a scenario that finds Trump seemingly far more desperate for a deal than Xi. Recall the following excerpt from a note penned late last month by Wells Fargo’s Chris Harvey:
Tenured equity investors have seen this story before and it typically ends with the Fed cutting not raising Fed Funds. In 2019, growth was already expected to decelerate and now we have the potential for the capital markets to amplify the anticipated slowdown. In the near term, we see little to mitigate the cycle’s acceleration. Adding insult to injury, the capital markets turmoil potentially gives the Chinese some trade leverage.
Trump probably assumed the “truce” struck at the G20 in early December would have been enough to placate markets, but he was wrong. His attempts to strong-arm the Fed backfired, as public criticism arguably (and paradoxically) forced Jerome Powell to hike while also exaggerating the importance of that hike in the minds of investors. At the same time, the government shutdown rattled confidence further.
Now, according to the Bloomberg article linked here at the outset, “Trump’s willingness to cut a deal with Beijing is driven in large part by his desire for markets to rally”. As you’re no doubt aware, Trump views stocks as a benchmark for his performance and as such, he’s aghast that stocks fell into a bear market on his watch.
Bloomberg goes on to note that the push for a quick deal is being spearheaded by Steve Mnuchin and Larry Kudlow while (surprise, surprise) Lighthizer (and likely Navarro) are still arguing for a hardline stance.
While the trade hawks prevailed on a number of occasions in 2018 (with perhaps the most famous example being the quick death of the May 19 pseudo-deal that Mnuchin struck with Chinese Vice Premier Liu He), that was when U.S. stocks were rallying. Now that Wall Street is catching down to the rest of the world’s reality, Lighthizer and Navarro might find it more difficult to prevail upon Trump to hold the line.
Obviously, Chinese stocks are still beset with concerns and not just about trade. But as you can see from the following chart, the performance gap between the S&P and the SHCOMP narrowed materially from the wides by late December, underscoring the extent to which the trade war came home for the holidays.
Now then – let’s all take a moment to laugh (really loudly) at the following classic clip from a Trump rally held back on August 4.