Broken Deals And Shattered Rally Dreams

“He’s a good man. But they broke the deal”, Donald Trump said Wednesday evening at a cartoonish rally in Panama City Beach, Florida.

The “he” refers to Chinese Vice Premier Liu He. “They” of course refers to China.

Markets keyed on that soundbite Thursday, although it’s not clear why. Trump will be Trump, and when he’s in stadium rally mode, he’ll say anything to get a rise out of the raucous crowd. Besides, his base loves a fight. Recall this assessment from Wednesday:

But thanks to the fact that Trump’s appeal with his base rests in part on the perception that he’s perpetually “fighting the good fight” (even when that entails harming the very people who came out in droves to vote for him), it’s never entirely clear whether he’s chasing the elusive target — at best pursuing a “win” with China so he can turn his figurative guns on Europe, and at worst negotiating in bad faith, comforted in the notion that his supporters revel in the “us versus them” narrative.

Beijing says Trump is pushing a false narrative. “There have been various commitments made for us”, the Commerce Ministry said Thursday, adding that “China is credible and honors its word and that has never changed.” Meanwhile, the ministry is set to outline the details of retaliatory measures which will presumably go into effect shortly after Trump more than doubles the tariff rate on $200 billion in Chinese goods Friday.

The Chinese delegation flew wearily back to Washington today for another round of talks. During what’s being described as a tense exchange on Tuesday, Steve Mnuchin was reportedly assailed for suggesting that the US trust Liu to help push the deal over the finish line.

Whatever the case, markets weren’t amused. Reports that North Korea test-fired two short-range missiles didn’t help and neither did April credit data from China. Total social financing was 1.36 trillion yuan last month. That missed consensus (1.65 trillion) and the low end of the range (range 1.43t yuan to 2.5t yuan, 27 economists).

New yuan loans missed as well, printing 1.02 trillion versus estimates of 1.2 trillion yuan. The figures mark a deceleration from March, and lend some credence to the notion that the market shouldn’t bet on blockbuster credit growth out of China.

Mainland shares fell again on Thursday amid souring sentiment. The CSI 300 is on track for its worst week since Vol-pocalypse. Foreigners are getting out of dodge, dumping an average of nearly $650 million a day in A-shares via the Hong Kong links. That would make this the biggest week of foreign outflows on record.

The offshore yuan now sits at its lowest since January, having fallen more than 1% during the last three days. The Shanghai Composite is down nearly 14% from this year’s euphoric highs.

This is also the worst week for H-shares since last year’s VIX ETN extinction event. And volatility in Hong Kong has spiked the most since that same infamous week in February 2018.

All in all, Trump has “succeeded” in throwing things for a loop this week and although US equities have had a rough go of it too, the pain on the Mainland in China has been acute. Hong Kong is feeling the heat as well and, generally speaking, we look to be right on the doorstep of a steeper drawdown assuming things escalate into the weekend.

I suppose we can take solace in the notion that this is all part of the plan, according to Trump. There’s an “art” to deals – even broken ones.


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4 thoughts on “Broken Deals And Shattered Rally Dreams

  1. So, Putin tells Trump to shake his fist at China, oh, and send a carrier and support fleet to Iran. Market face plants, but that’s ok, because volatility, disruption and uncertainty in the US is GOOD for Russia. Not so good for Trump, who sees stock index level as some sort of ratings analog for his Presidency. Not sure when the dolt will make the connection between “breaking things”, markets and the economy, but his tough guy posturing is really tiresome.

  2. H, this deal looks dead and if/when the new tariffs happen I don’t think we will see any meaningful negotiations between the U.S./China to come. China’s main goal appears to delay the U.S. till elections and not actually sign a deal in good faith that addresses U.S. core needs. So, what is stopping the U.S. from sending trade representatives out to other Asian-Pacific countries, Mexico, etc to start taking over China’s value-added manufacturing exports business? I think this is a very rational alternative that will weaken China’s negotiating stance and possibly bring them to the table in the future; it is also very beneficial just due to diversification of supply chains out of China. Not saying said countries will take over China’s export business to the U.S., but they will make a meaningful difference on China’s U.S. export business.

    I do realize that Trump the Tariff Man isn’t rationale and hasn’t treated our global allies in good faith, but Bob and Steve should’ve brought this up during the early negotiations with China as a alternative plan.

    If you have time I would like your thoughts on this matter. Thanks H.

      1. Yes you are right, but idk why the U.S. government isn’t (more) involved since this has such a crucial impact on global socioeconomic health. Shouldn’t the U.S. Commerce Department and USTR be involved in promoting viable alternatives, or are we just not hearing about this in the news? Just some stuff that bothers me because it is obvious that China won’t change its ways and the tariffs are a massive burden on everyone.

        Rant ended lol.

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