If we’re in for a repeat of last May, it won’t be pretty for equities this month.
April found the S&P logging its best monthly gain since 1987, but things ended on a decidedly sour note. May looks poised to begin in similarly downbeat fashion amid concerns the White House could finally make good on implicit (and, in some cases, explicit) threats to ban The Thrift Savings Plan from executing a planned reshuffle that would entail having a $50 billion fund mirror the MSCI All-Country World index. China is the third-largest country weight in the benchmark.
The decision to lift government employees’ exposure to Chinese equities was made two years ago. The debate about whether to stick to it has been raging for months, with Marco Rubio spearheading an effort to force The Federal Retirement Thrift Investment Board to cancel the plan due to concerns about funneling money to China.
The administration is weighing options for punishing Beijing for a lack of transparency around the coronavirus, and high on the list is an executive order blocking the TSP’s transition, which is scheduled for this year.
A senior administration official said Thursday that no decision has been made, but Rubio was quick to cheer the “rumor”.
“It’s outrageous that five unelected bureaucrats appointed by the previous administration have ignored bipartisan calls from Congress to reverse this short-sighted decision, and I applaud President Trump for directing his administration to take swift action preventing this from going forward”, he remarked.
Of course, some think it’s “outrageous” that Congress would presume to instruct an investment board to cancel a plan deemed in the best interests of the employees whose returns it’s tasked with maximizing, but Rubio has been unrelenting in this push. The government connection gives him a leg to stand on.
The senator sparred with MSCI itself last year over the index provider’s inclusion of firms which the US has targeted in various efforts to send a message to Beijing over its human rights record.
A decision to overturn TSP’s plans by executive decree was actually seen as the least controversial option last year when the administration was considering a variety of measures to cut off the flow of capital to China. Trump also reportedly considered forcibly delisting Chinese companies from US stock exchanges and commandeering the stock index construction process at benchmark providers. Those plans were widely decried as potentially dangerous and panned as a “disastrous non-starter” by some market participants.
Traders are now concerned about a re-escalation of the trade war and further recrimination around the virus. Tariffs appear to be back on the worry list in addition to possible restrictions on capital flows.
Last May, equities suffered what would end up being their worst month of 2019 when Trump broke the Buenos Aires truce on the way to hiking tariffs and blacklisting Huawei. It goes without saying that just about the last thing the market needs right now is a trade escalation in the middle of the deepest global downturn since the Depression.
Larry Kudlow on Thursday was forced to refute a Washington Post report which suggested the administration is at least considering the criminally insane (forgive the hyperbole, but that’s about the only way I know to convey the absurdity of it) idea of canceling some US debt to Beijing.
As detailed extensively in “Lindsey Graham: America Should Intentionally Default On Trillions In Debt To Punish China For Pandemic“, repudiating government obligations on a country-specific basis is quite literally non-sensical. China’s Treasurys are not “debt to China”. They are marketable securities. Beijing can just sell them. The only way to carry out such a plan would be to make it illegal to transact in US debt instruments with Beijing or any entity thought to be acting on its behalf.
According to one industry veteran I spoke to on April 12, that “would basically be an act of war”. Another strategist at a major Wall Street bank said any such effort would be “financial armageddon”.
In any case, Trump seems determined to take action against China in connection with the pandemic and spent a good part of this week lobbing thinly-veiled accusations Beijing’s way.
Despite a statement from the Office of the Director of National Intelligence saying there is no definitive assessment as to whether the outbreak “began through contact with infected animals or if it was the result of an accident at a laboratory in Wuhan”, Trump told the media he’s seen evidence that COVID-19 in fact came from the Wuhan Institute of Virology.
Given the president’s penchant for reveling in conspiratorial narratives, it’s a slippery slope from “lab accident” to “bioweapon”, and it wouldn’t be at all surprising to see Trump slide that way. Such a storyline might play particularly well in an election year, given how effective “blame China” was in 2016.
Pressed to clarify what makes him more confident in the lab origin story than the generally accepted wet market theory, Trump said “I can’t tell you that”. Pressed further, he reiterated the point. “I’m not allowed to tell you that”.