You’d be forgiven for asking whether anyone buying the dip on Monday in US equities might have missed the point.
Arguably, it’s not so much what Donald Trump’s Sunday evening tariff threats mean for the chances that a trade deal eventually comes to fruition that’s disconcerting. Sure, market participants would be aghast if the whole thing fell apart in earnest and an all-out trade war ensued, but presidential posturing aside, that still seems far-fetched. Rather, the most worrisome thing about what Trump did on Sunday is that it underscores his penchant for throwing caution to the wind – for shooting from the hip, with little to no regard for the consequences.
This is one point we conceded back in December, when someone of a persistently bearish persuasion argued that their dour take on risk assets and general affinity for hyperbole wasn’t predicated so much on a doomsday thesis, but rather on a quick scroll through the president’s Twitter feed. Of course, that left unexplained why that same commentator was parroting a similarly dire narrative long before Trump’s presidency, but the point was a good one.
Goldman touched on the same thing while documenting the extent to which there’s now more uncertainty around the auto tariffs threat and the USMCA. “In both cases, the President’s willingness to risk a market disruption by threatening an unexpected tariff hike suggests that he might also be willing to risk the disruption that formally proposing auto tariffs or announcing the intent to withdraw from NAFTA might cause”, the bank wrote Monday.
If you think the real issue here isn’t that the odds of an eventual trade deal have been materially reduced, but rather that what we got from the president on Sunday is yet another indication that the man with his finger on the proverbial button isn’t as “stable” as he famously proclaimed, well then the dramatic comeback shown in the following simple chart might suggest that some folks (or algos) are whistling past the graveyard.
Whatever the case, if Trump was looking for a “win” in relative equity market performance, he got it on Monday. This was the best day of the year for the S&P compared to the Shanghai Composite and the best day of outperformance for the Russell versus the ChiNext since early 2016.
The proximate cause of the turnaround in US equities was obviously the CNBC story, which suggested that the Chinese delegation would still make the trip to Washington despite Trump’s best efforts to infuriate Beijing.
“One of the sources briefed on the status of talks said the Chinese would send a smaller delegation than the 100-person group originally planned”, CNBC reported, adding that “it is unclear whether Vice Premier Liu He would still helm this smaller group, an important detail if the team were traveling to Washington with an eye toward sealing a deal.” There will be no final deal this week if Liu isn’t present – or at least you certainly wouldn’t think so.
After the close, reports indicated the Vice Premier will join the Chinese delegation after all, but any good vibes that might have accompanied those headlines were summarily negated when Bob Lighthizer reiterated that the US will increase tariffs on $200 billion in Chinese goods this Friday.
“We felt we were on track to get somewhere. Over the course of last week we have seen an erosion of commitments by China” Lighthizer said. The US will hike the tariff rate to 25% at 12:01 AM on May 10, he added.
That led to a quick, after-hours knee-jerk lower for SPY (and Apple and Caterpillar and [fill in the blank]):
Earlier in the session, Bloomberg reported that Trump’s ire was raised when Lighthizer informed him that the Chinese made it clear Beijing would not be rewriting Chinese law as part of any deal. That, apparently, suggested the thorny issue of forced tech transfer was not resolved.
Lighthizer’s after hours comments were accompanied by soundbites from Mnuchin, who said the trade talks recently saw a “big change in direction”. The Treasury Secretary insisted that the market reaction “is not a factor in the trade talks”.
That’s a good thing, because despite the rebound during the US cash session, there was still plenty of damage done across markets. Grains were crushed, for instance, and Mainland shares in China will have a lot of ground to make up to erase Monday’s plunge. Also of note, the CNBC stick-save came too late for European equities, which closed with losses.
But the selloff in the yuan abated (USDCNH up “just” 0.6% on the day, after the yuan initially plunged more than 1% following Trump’s tweets and news that the Chinese may postpone negotiations). The yen came off the highs, although it still outperformed all G-10 peers. Treasuries pared gains with the 10-year richer by 2.7bp after yields initially fell ~5bp. Etc.
Now, all of this is back up in the air, though. The yen surged and yields tumbled again as soon as the USTR headlines crossed.
It’s not entirely clear whether Lighthizer actually said anything new, but the market seemed to interpret his comments as a more definitive than Trump’s Sunday Twitter tirade and dubious Monday morning encore.
It could well be that any relief Asian markets might have gotten from the intraday comeback in US stocks was summarily negated by Lighthizer after the bell.