Global markets whipped themselves into a bullish frenzy on Friday, primarily on the assumption that Donald Trump’s scheduled meeting with Chinese Vice Premier Liu He (at 2:45 in Washington) will mark the rolling out of a “limited” trade deal between the world’s two largest economies.
The rumor mill has been in full swing all week long. Beginning on Thursday, markets began to put a positive spin on the evolving narrative which had generally coalesced around the idea that although China would not bend on key structural sticking points (e.g., industrial policy, IP theft and forced technology transfer) the two sides were likely to cobble together an agreement that includes a currency “pact”, agricultural purchases and, crucially, some kind of tariff relief for China, whether that’s Trump delaying next week’s planned escalation and the scheduled December levies, or something more meaningful.
Trump has fueled the optimism, describing the talks as having gone “very well” on Thursday. Later, at a criminally insane rally in Minneapolis (seriously, it was off the charts even by Trump’s standards), the US president had this to offer:
Obviously, that story about an unidentified Chinaman randomly calling the White House to congratulate Trump on the US economy (which as of August is in a manufacturing recession) is nonsense, but you get the idea – he’s a showman and he’s teasing an interim agreement.
Between that, and Brexit optimism which has catalyzed absurd moves in Gilts and the pound over the last 24 hours, global risk assets are ebullient.
The Hang Seng had its best day in more than a month, and the DAX rose as much as 2% at one juncture, as the good vibes proliferated.
Meanwhile, US equity futures are now up some 3% off the lows hit after SCMP reported on Wednesday evening that deputy-level trade talks in Washington had made “no progress” and that Liu He would likely cut his trip to the US short by a day.
This is why you shouldn’t trade on rumors:
Of course, most of this euphoria is misplaced. After all, the global economy is on the precipice of a full-on recession, the US economy looks poised to decelerate to what, by recent standards anyway, is an anemic pace of growth, and unless Trump shocks the world by announcing a complete end to the trade war, any “interim” or “limited” deal with Beijing will be just that – limited.
Don’t forget, Trump’s most powerful lever when it comes to compelling the Fed to cut rates and otherwise lean in an accommodative direction is the trade war.
Don’t expect him to give up that leverage over the central bank by calling a definitive end to the dispute with China.