China Markets trade

The Worst-Case Scenario Is Now The Base Case

"It is more likely than not"...

Amusingly, the NYSE TICK index (uptick minus downtick) ticked (sorry) 1,579 in early trading Friday, suggesting a one-sided bid that stood out given the time of day.

“Today’s high for the TICK index is on the open, the prior ones came during afternoon rallies”, Bloomberg’s Andrew Cinko wrote. It’s reminiscent of the type of one-sided action that characterized the post-Christmas Eve massacre rally, when a massive rebalancing flow helped ensure December’s rout didn’t morph into some kind of historic catastrophe.

Anyway, it probably won’t sustain itself. The setup right now is conducive to sideways “chop”, at best. And that’s assuming there aren’t further escalations in the now overtly bitter dispute between Washington and Beijing.

Chinese ambo Cui Tiankai showed up on Bloomberg TV Friday to discuss recent events. He called the Trump administration’s allegations against Huawei “groundless” – an “unusual” example of a government bringing the power of the state to bear on a company. That’s obviously disingenuous. Most of what Trump does can be properly characterized as “groundless”, but there’s some merit to US concerns about Huawei. The issue, though, is that because Trump is Trump, he can’t do anything right. The US president’s dubious track record on, well, on frankly everything, means that even when he’s right, he’s wrong. Trump is a reverse Lefty Guns. Cui underscored that as follows:

What are people really up to under the pretext of national security? We don’t know. Can they really stop the technological progress? Can they really deprive people of the right to benefit from the technologies? I don’t think so. And do they really have the interests of the American people in mind? I don’t think so either.

That is an unequivocally accurate assessment. Nobody knows what Trump’s end game is – perhaps not even Trump himself. This was always the risk. For a year, analysts and experts have warned that the conflict could spiral past the point of no return before the US realizes what happened. That, apparently, is where we are now.

Wall Street has now begrudgingly come to the conclusion that what was previously the “worst-case”, is probably the “base case.” We talked about this at length earlier this week.

Read more: Make ‘Miscalculation’ Great Again

“The odds of a continued stalemate have risen, we believe, as have the odds of additional tariffs”, Goldman lamented on Wednesday, before admitting that even after Trump went ahead with a doubling of the tariff rate on $200 billion in Chinese goods earlier this month, they still believed the odds of the US going “all-in” (as it were) to be relatively low. Needless to say, recent events have changed the bank’s assessment.

“When President Trump announced his intent to increase the tariff rate from 10% to 25% on imports on List 3 and to impose a 25% tariff on all remaining imports from China, we took seriously the risk of tariffs on List 3 but did not believe there was a substantial risk that tariffs would be implemented on List 4”, Goldman writes, in the same note. “Developments since then suggest the risk has increased further [as] the Administration’s actions regarding foreign communications technology in general and Huawei in particular represent a clear escalation.”

That’s correct. And the issue is that even if you believe this is an “art of the deal”-type gambit, the Chinese may have no choice but to treat it as a real threat. “It likely makes it more difficult for Chinese leaders to accept an agreement in the face of additional US pressure”, Goldman warns.

With no further talks scheduled and the clock ticking, the odds have most assuredly increased that Trump will find himself with little choice but to move ahead with additional tariffs. How else would he reconcile his threat with the absence of negotiations? Nomura agrees. “We now think it is more likely than not that the Trump administration will move ahead with the final tranche of tariffs targeting roughly $300 billion in imports from China at a 25% rate [and] in the interim, it’s likely that China responds to the Huawei escalation”, the bank’s global markets team wrote, in a note dated Wednesday.

For his part, Cui told Bloomberg that the Huawei situation could go either way. “If things are moving in the wrong direction, then you could see a response very soon”, he said. “But if we could work together to push in the right direction, then things will get better of course.” Yes, of course.


As far as the whole “the G20 will save us” narrative goes, that’s far from a sure bet. In fact, it’s not even a guarantee that Trump and Xi will chat.

“There is a material risk that the two leaders will decide not to meet at the G20”, Nomura warned this week.

“Recent US actions… may increase domestic pressure in China to take a hard line against the US, despite the Commerce Department’s 90-day temporary general license for [Huawei]”, the bank went on to say. “If both sides believe that further escalation is inevitable, it is possible they will decide to forgo a bilateral meeting”.




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