During Donald Trump’s manic (and that’s a generous characterization) call-in interview with Fox’s Maria Bartiromo on Wednesday, the president detailed what he described as “Plan B” for compelling China to bend the knee.
“My Plan B with China is to take in billions and billions of dollars a month and we’ll do less and less business with them”, Trump told Bartiromo. It wasn’t immediately clear how that’s any different from “Plan A”, which, after a year, has dead-ended in recriminatory balderdash and a seemingly intractable stalemate.
Trump still believes in the power of tariffs, that’s for sure. “Tariff Man” is alive and well, and the president said as much during his breathless Wednesday rant on Fox. Here’s the clip, for anyone who was blessed enough to miss it:
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To the extent that’s decipherable, it suggests Trump is sticking with the notion that tariffs are, to quote SocGen, “being promoted as a kind of miracle cure for all possible issues that involve another country.”
Administration officials have indicated that the goal of the G20 meeting between Trump and Xi Jinping is to get talks restarted, but the market is expecting a bit more than that. To be clear, nobody (not markets and not the White House) thinks an actual deal will be struck on Saturday. What markets are hoping for (indeed, expecting) is a truce similar to that agreed in Buenos Aires in December.
What we’ve been at pains to emphasize over the last three weeks is that in light of recent events, Xi may see no utility in agreeing to another handshake deal that finds each side postponing further escalations, given that Trump’s actions suggest he isn’t inclined to keep his word. Remember, Trump has never negotiated in good faith in this dispute. Don’t forget that Canada arrested Huawei’s Meng Wanzhou on the very same Saturday that Trump and Xi dined in Argentina. Last month’s tariff hike, the Huawei blacklisting and the addition of four firms tied to China’s super-computing industry to the Commerce department’s entity list only underscore the notion that the US isn’t to be trusted, as does Trump’s threat to slap tariffs on Mexico, a country with which he had already struck a trade deal.
Of course, China has been accused of backtracking on promises to Bob Lighthizer and Steve Mnuchin and Beijing’s decision to adopt their own corporate blacklist and implicitly threaten a rare earths ban will give the US side pause.
“Both sides might believe that the other lived up to its promises in letter but not in spirit”, BofA wrote Tuesday, in a G20 preview. “The US did delay the tariffs, but eventually implemented them on May 10 [and] China did increase its purchases of agricultural products from the US in the first four months of this year, but its imports remained 44% below their level from the same period last year”, the bank went on to say.
In the lead up to the G20, pundits, analysts and traders are falling all over themselves trying to determine what’s “priced in” and what’s not. That exercise is complicated immeasurably by the fact that most assets are now trading off central bank stimulus hopes (and, more narrowly, Fed cut odds).
For what it’s worth, Goldman has developed a “US-China Trade Tension Barometer” designed to track “the intensity of equity market-implied trade concerns”. The original note (published June 20) documenting the construction of the gauge is a dozen pages long, but, thankfully, the bank summarized it on Wednesday. Simply put, the barometer “represents the principal component of four return and four valuation series of US and China stocks that closely track trade concerns”.
What it shows is that the market-implied probability of a trade resolution plunged from 80% prior to Trump’s May 5 tweets to just 7% on May 24. It sat at 20% late last week and is at 15% today.
If you’re wondering what this implies for US equities, you’re in luck, because Goldman’s US team has run some regressions with it. Specifically, the bank notes that “a simple linear regression shows that a 10 percentage point increase in the perceived likelihood of a trade deal has corresponded with a roughly 1% (or 0.1x) expansion in the S&P 500 P/E multiple and a 5% decline in VIX since tariffs on $200 billion of Chinese imports were first implemented at the end of 3Q 2018”.
Extrapolating from that, a US equity market that comes to believe a trade resolution is a certainty (i.e., 100%) translates into 1X worth of multiple expansion. Because the bank projects the S&P multiple of 17X to remain largely unchanged through year-end, the perception that a Sino-US trade pact is certain provides some upside to the bank’s SPX 3,000 target via multiple expansion.
If you were looking for a data-driven, roundabout way of saying that markets will rise in the event equities believe a trade truce is in the cards, that will work, although the whole thing feels a bit self-referential. Basically, Goldman’s work on this is a testament to what you can do with unlimited access to data and analytics tools. The two notes referenced above together contain some three-dozen charts and tables, including the following visual which is some semblance of useful if you’re so inclined.
In their own G20 preview, BofA sums things up more colloquially. The bank notes that “having been ‘head-faked’ once”, investors might be reluctant to pile into risk assets at the first sign of deescalation. Instead, BofA sees “a modest positive for risk assets in the short run, if only because it means the tail risk of a full-blown trade war is delayed”.
The bank’s Aditya Bhave and Ethan Harris conclude on a somber note. “Trade-war uncertainty is already eating away at business confidence and the equity market is only being held up by the promise of very aggressive policy easing in both the US and China”, they write. “Enjoy the truce while it lasts.”