‘Trade War 2.0’ And The Empty Optimism Toothpaste Tube

“We are now in the ‘already squeezed the reasons for optimism out of the toothpaste tube’ phase”, Nomura’s Charlie McElligott wrote Monday, as global risk aversion proliferated on the back of renewed geopolitical tensions and harsh economic realities in the “here and now” (i.e., irrespective of expected improvements down the road).

Donald Trump appears close to donning his “Tariff Man” costume to extract “reparations” from China over the coronavirus, which the administration is poised to say originated in the Wuhan Institute of Virology, not a local wet market.

During an interview conducted in the shadow of Abraham Lincoln (literally), the president told Fox that tariffs would be the “ultimate punishment” for the Chinese. He promised a “strong report” on the origins of COVID-19. “We will be giving a very strong report on what we think happened, and I think it will be conclusive”, Trump said. “Personally, I think [China] made a very horrible mistake. They tried to cover it [up]”.

“Tariffs at a minimum are the greatest negotiating tool”, he went on to muse. Suffice to say America’s importers (and quite a few farmers) do not necessarily agree with that assessment.

Trump also made it clear that if China doesn’t live up to their commitments under the trade deal, the US will terminate it. If that happens, stocks will crash. That’s not hyperbole – it’s just a statement of fact.

Steve Mnuchin drove the point home around 12 hours later. “I have every reason to expect [China will] honor this agreement, and if they don’t, there would be very significant consequences in the relationship and in the global economy as to how people would do business with them”, the Treasury secretary said, unironically, without even a nod to the fact that the administration’s stance on trade and international relations may have done irreparable harm to America’s global standing.

The administration is still weighing options, but I suppose what’s vexing market participants is the notion that any “punishments” inflicted on Beijing will almost invariably result in China calling into question its obligations under the trade agreement. It seems far-fetched to assume Xi will stay committed to the deal under a new tariffs regime, and a move to ban investment in Chinese equities by the TSP would be a slap in the face.

I noted on Sunday evening (here) that the yuan will be crucial going forward, and traders will be watching the PBoC closely once the mainland comes back off the holiday for signs that Beijing intends to send a message to Trump with the currency.

“USD/CNH is vitally important as the exchange rate of the world’s two largest economies, and as a key trigger for risk off panic when CNH starts to fall”, Rabobank’s Michael Every wrote Monday.  “It is not a real market in the traditional sense (though what is nowadays?)”, he went on to say, before (correctly) characterizing the pair as “a political virtue-signaling device”.

The offshore yuan had its worst day in quite a while on Friday, although things were relatively calm to start the new week.

“USD/CNH is using the vacuum left by mainland holidays to see how far it can extend an upside break fueled by the threat of more trade tensions between the US and China”, Bloomberg’s Mark Cranfield said, noting that one-month implied vol. is up near 7%. “Should it get close to the March high around 9.7%, it will show that Asia is on alert for trade war version 2.0”, he added.


Getting back to stocks, US equities were tracking for a third day of losses, which would be the longest such streak since March. Regardless of how it pans out, sentiment is deteriorating. Nomura’s McElligott echoed Morgan’s Mike Wilson in noting that the 200-week moving average down around 2,650 seems about “right” if there’s a retest lower.

We’re currently straddling the gamma flip line, with dealers “modestly short”, Charlie writes.


“We expect stocks to remain volatile as markets struggle to find a balance between announcements on the lifting of lockdowns, data on potential treatments and vaccines, economic releases, news on the course of the pandemic, and changing political dynamics”, UBS reckons. “In our view, investors should remain positioned for upside, but also sufficiently diversified to protect against potential negative surprises”.

Yes – “potential negative surprises”, such as the announcement of punitive measures against the world’s second largest economy couched in terms of “reparations” for purportedly causing a pandemic.

Somehow, “potential negative surprises” seems like an understatement.

As Rabobank’s Every cautioned, “it seems both sides are doing their level best to undermine relations with a series of tunnels that destroy the foundations of trust and by trolling the other”.


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4 thoughts on “‘Trade War 2.0’ And The Empty Optimism Toothpaste Tube

    1. They initially published that in March. At the time I did not know I was reading fake news. I better look into that Brookings crap I read. It is a shame people do not read this stuff in print anymore, book burnings can never be great again.

  1. Noteworthy that the 200-WEEK MA support @ 2650 is also currently the max short gamma level for the option dealers. That better be very strong support, because it looks like the velocity of selling approaching 2650 will be quite high.

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