Sharpen The Sabres: US-China Tensions Reach Boiling Point As Pompeo Branded ‘Evil Clown’

Risk appetite was on reasonably solid footing Tuesday, even as worries about the future of US-China relations persist and a top court in Germany injected a bit of uncertainty into the “Whatever it takes” narrative embedded in the ECB’s crisis response.

On the geopolitical front, Li Zimeng, a newscaster for China Central Television, accused Mike Pompeo of feeding off his “own lies” during Sunday’s abrasive interview with ABC, during which America’s top diplomat said there was “enormous evidence” to support the assertion that COVID-19 came from a Wuhan lab, not a local wet market. “Remember, China has a history of infecting the world”, Pompeo told Martha Raddatz.

“If the cheating behaviors from evil politicians like Pompeo continue, the US’s ‘Make America Great Again’ could become merely a joke”, CCTV’s Li seethed, reading from a commentary that carried the hilariously overwrought title “Evil Pompeo is wantonly spewing poison and spreading lies”.

It gets better. The People’s Daily has published at least two commentaries this week aimed at Pompeo and Steve Bannon, labeling the two men a “pair of lying clowns”. Bannon, the People’s Daily charged, is a “Cold War living fossil”.

Mainland markets are set to reopen and all eyes will be on the CNY fix. The hope is that cooler heads prevail, and state media has generally refrained from going after Trump directly. While the US president likely won’t appreciate the derisive reference to his cherished MAGA mantra, he’s called Steve Bannon worse things than a “living fossil”.

“It is probably not a coincidence that both of these stories emerged yesterday”, Rabobank’s Michael Every wrote Tuesday, in a note, referencing a pair of Reuters reports which point to more antagonism ahead.

“The Trump administration is ‘turbocharging’ an initiative to remove global industrial supply chains from China as it weighs new tariffs to punish Beijing for its handling of the coronavirus outbreak”, one of the stories notes, citing officials familiar with the planning process, who also said Commerce, State and other agencies “are looking for ways to push companies to move both sourcing and manufacturing out of China [including] tax incentives and potential re-shoring subsidies”.

This has, of course, always been the plan, it just hasn’t been as easy to implement as Trump figured. It turns out that busting up globalized supply chains by decree is harder than it sounds (imagine that). Importantly, it won’t happen without stocks having their say. Last August, when Trump tweeted he was “hereby order[ing]“companies to leave China, US equities rendered their judgment, plunging in a harrowing Friday slide, which in turn compelled Trump to reverse course just days later.

And yet, the push now has a greater sense of urgency following the epidemic. “This moment is a perfect storm; the pandemic has crystallized all the worries that people have had about doing business with China”, one senior US official told Reuters. “All the money that people think they made by making deals with China before, now they’ve been eclipsed many fold by the economic damage [from the virus]”, the person added. For the record, that’s probably not true. One (or two or even three) lost quarters hardly negates years of gains from offshoring, but you get the point – the virus has changed the game.

Another Reuters exclusive cites “an internal Chinese report” cautioning Beijing that China is set to endure “a rising wave of hostility in the wake of the coronavirus outbreak that could tip relations with the United States into confrontation”. The report – written by a think tank linked to the Ministry of State Security and reviewed by Xi – allegedly says the Party should “be prepared in a worst-case scenario for armed confrontation between the two global powers”. Reuters said it hadn’t actually seen the document.

All of that just underscores the rapidly deteriorating state of Sino-US relations, and it goes without saying that Peter Navarro (and Ron Vara) is seizing the opportunity to promote his own brand of jingoism. “Buy American is going to be the law of the land I believe soon”, Navarro told Fox, in an interview, noting that China’s alleged coverup of the origins of COVID-19 is more important than what “may or may not happen with the trade deal”.

You get the idea. We’re on shaky ground with this.

“The US clearly wants China to know that economic sabres are being sharpened in the hope that they don’t have to be used, just rattled”, Rabobank’s Every remarked on Tuesday.”And China wants the US to know that they know the sabres are being sharpened and that the outcome would be awful for both sides if they are used”.

As I’ve been emphasizing since midway through last week (see here and here, for example), the yuan could be the next shoe to drop – or not. 1-month vol. is now back above 1-year.

(BBG)

“While spot USD/CNH is holding around the 7.13 area, there is a lot more going on under the hood”, Bloomberg’s Mark Cranfield remarked, observing that on Monday, yuan options “were the second-most traded globally, despite a holiday in China with volume double the 5-day average”.

Of course, China has to walk a fine line. “Too much” depreciation can be perilous, and it would be natural for the PBoC to push back against market speculation that 7.20 is in the cards.

That said, Cranfield says “it will be difficult to completely suppress bearish sentiment against the yuan as long as US leaders maintains verbal attacks against China over the origin of the virus“.

“One can make the point that USD/CNH is hardly moving, yet as stressed yesterday, this is not really a market”, Every went on to say Tuesday. “When it starts moving sharply we know that at least one sabre is already being used”.