US equities suffered a third consecutive daily loss on Tuesday thanks almost entirely to trade angst.
For the second straight day, Donald Trump ramped up the aggressive tariff banter, suggesting, among other things, that it may be preferable to wait until after the election to do a deal with China and that Germany could face adverse trade consequences if Berlin doesn’t fork over more money for the mutual defense.
The US president’s remarks – delivered in London, where he’s currently stomping around at a gloomy NATO summit – set the tone early. Stocks trimmed losses (the Dow was down more than 400 points at one juncture), but it was still a lackluster session.
Unlike Monday, bonds did not fall in tandem. Rather, 10-year yields plunged 11bps, bull flattening the curve. Indeed, Tuesday was the best day for the long bond ETF since the 2s10s inverted on August 14 (much to Trump’s chagrin at the time). 10-year yields were below 1.70% at one point — the lowest since November 1, prior to the furious bond selloff and accompanying pro-cyclical rotation under the hood in equities.
At one point, Trump attempted to downplay the selloff, calling Tuesday’s losses “peanuts”. He also claimed he doesn’t care about stocks. “But if the stock market goes up and down… I don’t watch the stock market”, the president declared, an absurd contention coming from a man who literally benchmarks his performance to the Dow.
“I watch jobs. Jobs are what I watch”, Trump continued. “I watch making the proper deal”.
Again, that’s absurd. Trump watches stocks more than some traders watch stocks, and the only reason he may not have been watching them as closely on Tuesday as usual, is because he’s preoccupied with the NATO summit where, for once, he actually isn’t the only antagonist and maybe not even the biggest (Emmanuel Macron has a claim on the top spot for his “brain dead” remark about the seven-decade-old alliance).
In any event, the “Phase One” trade deal that was at the heart of everyone’s base case as late as Friday is in doubt. You’d be forgiven for suggesting that now, the best anyone can hope for is a delay to the December 15 escalation – although China continues to insist on the rolling back of existing tariffs, Trump doesn’t sound like he’s in the mood for that.
Throw in the Hong Kong situation and news that the administration once considered cutting Huawei off from the US banking system, and you’ve got a pretty contentious setup. Nomura’s Charlie McElligott had this to offer:
The interpretation of Trump’s ‘better to wait until after the election’ for a China trade deal comments is that the Hong Kong human rights bill sponsorship by POTUS has clearly agitated the Chinese side (plus this morning’s Reuters report stating that the White House is considering kicking Huawei out of the US financial system), and in conjunction with the narrowing window to act on the Dec 15th tariff ‘fill or kill’ is likely incentivizing monetization of the +9% gain made in the S&P since early October via profit-taking in Options- ($Delta still 94th %ile since 2013 even after yday’s selloff) and Futures- (Asset Manager S&P Futures $notional position currently 99.6th %Ile since 2006 at $141.7B) positioning “extremes”.
Earlier, McElligott warned that while CTAs weren’t likely to start de-leveraging unless spot fell much further, dealer gamma positioning was near the potential “flip” level around 3,073.
The bottom line is that Trump will need to try and calm things down over the next 48 hours, perhaps with some conciliatory rhetoric. With the Fed highly unlikely to even consider another cut next week, there’s nothing to stop things from spiraling out of control if the December 15 deadline comes and goes with no resolution and more tariffs go into effect.
Of course, Trump “doesn’t watch” the stock market, so he wouldn’t know anything about any of this.
My read of the tea leaves is trump will look to postpone the Dec 15th tariffs until January. This allows him to attempt to avoid a December flash crash like last year and would theoretically act as a distraction during the impeachment trial and allow him to say that the market crashing in Jan is because of the “attacks on trump“ via the impeachment and goad Powell et al into another cut.
Either way there won’t likely be a deal with China during the trump administration.
Meanwhile, the existing in-place tariffs continue to disrupt supply chains and damage profit margins, and business executives go into the new year with absolutely no idea what to expect from Trump (either with respect to China, or the EU, or you name the country).
But don’t worry, everything will be peachy and the SPX should levitate to new ATH’s in 2020. One of the used car salesmen on CNBC said so during today’s broadcast… (shocker)