In addition to impatience and a generalized penchant for engineering chaos, Donald Trump may have another reason to adopt a harder line when it comes to ongoing negotiations with China: He’s “winning” the financial asset war.
Or at least if you go by the simplest of simple comparisons.
The Shanghai Composite fell nearly 2% in November, and managed just meager gains in October and September, while the S&P has risen in all three months since trade tensions knocked things off track in August. In fact, US equities have outperformed Chinese shares in five of the last six months.
It’s a somewhat trivial comparison, but it does represent a remarkable turnaround from the first quarter, when Mainland shares in China got off to a blistering start in the new year.
In fact, the A-share rally was so ferocious in Q1, that some market participants began rooting for Chinese equities to cool off on the assumption further gains would worry policymakers in Beijing, leading to policy tightening even as the economy continued to decelerate.
The rally sputtered in the second half, though, while US equities built on gains logged during H1. Chinese shares have slipped since July, while the S&P has risen largely uninterrupted with August’s trade-related tumult being the only exception.
All told, US stocks have outperformed their Chinese peers by 11% so far in 2019. At the same time, the yield gap between Treasurys and Chinese 10-year bonds has widened back out to levels last seen in 2017 after shrinking to the narrowest since 2010 late last year.
This is a gift and a curse for Trump, though. As the president learned in 2018, you can’t have it both ways. If you pile fiscal stimulus atop an already strong economy and then deliberately undermine the economic fortunes of your trading partners, you end up with unwanted FX strength – especially when you print the world’s reserve currency, and your efforts to deliberately overheat the economy prompt the central bank to adopt a relatively hawkish lean.
The dollar is up more than 2% in 2019, while the yuan was allowed to depreciate through the psychologically important 7-handle in August to help cushion some of the blow from the new tariffs.
Trump has mentioned record highs on US equity benchmarks on several occasions of late, and it’s likely he’s taking that into account when considering how to deal with Beijing going forward.
Here’s hoping the old “we’re playing with the house’s money” line doesn’t make a cameo in any tariff-related tweets over the next two weeks.