Pricing the risk of another conflagration between the US and China is an inherently difficult task, so equities have decided not to bother, apparently. Best leave it to more sophisticated market participants and FX speculators, I suppose.
Wall Street tacked on more gains Wednesday despite a choppy session marred by extremely negative news on the Hong Kong situation and a threat from Donald Trump to shut down America’s social media platforms.
Small-caps really are the story right now stateside – they’re riding a five-day win streak, and have gained in eight of the last nine sessions.
Banks are on track for a stellar week.
This is mostly predicated on reopening optimism and the ongoing realization that monetary and fiscal stimulus are finally on the same page.
“There is a better chance of swift recovery from this shock than from the early 1980s or 2007-09”, Jim Bullard said Wednesday, during an online discussion. “There is much less confusion this time around than there would be in a financial crisis, as in 2007-09, or a more extensive recession, as in the early 1980s”.
But behind it all is a guaranteed fight between Washington and Beijing. This is something investors have learned to live with over the past three years, but as I’ve tried to dutifully impress upon readers, this time it’s considerably more serious.
Mike Pompeo made it clear Wednesday that the US won’t certify Hong Kong’s autonomy and revoking the city’s preferential tariff rates is reportedly on the table.
Read more: Hong Kong, Huawei Dramatics Play Spoiler To Otherwise Bullish Narrative
China has attempted to guard against excessive yuan depreciation, but the market isn’t playing along. USD/CNH is flirting with record highs.
Bloomberg’s Ye Xi spoke with David Loevinger, a former China specialist at Treasury about the situation on Wednesday.
“I expect the administration will come out first with a lot of tough talk and financial sanctions and visa restrictions on Chinese officials who probably weren’t dumb enough to keep funds in the US”, Loevinger said. “Then hold back some of the bigger guns like tariffs, export controls and investment restrictions until they see what the new law looks like and how it’s implemented”, he added, noting that “China’s response will likely continue to be measured, particularly against US companies that are major employers and procurers in China, but there is a risk the US overreaches and hits a nerve on Hong Kong or Taiwan”.
Asked about the trade deal, Loevinger was unequivocal. “The trade deal is toast”, he told Ye. “China’s import commitments weren’t realistic even when its economy was firing on all cylinders… there’s no way they’ll meet their commitments now”.
He did say, though, that neither side thought the targets were realistic in the first place, and the Trump administration may be keen to preserve the agreement for political reasons at least until the election.
For their part, BNP puts 30% odds on the deal coming unglued. “In our view, [Trump] will probably be reluctant to back away from the agricultural, manufacturing and energy purchase targets, which were insisted upon by American negotiators and which the president sees as his most direct way of rewarding his political base”, the bank says, in a noted dated Tuesday. “In order to demonstrate his toughness and shift blame toward China, he may feel tempted to reach for the tariff toolkit again, both as a threat and a way to gain remedial action”.
And yet, BNP notes that China’s quick recovery from the epidemic may mean Beijing believes it has leverage. BofA echoes those sentiments. “China’s leaders believe containment of the virus and a less dire economic outlook provide an opportunity for moving ahead aggressively”, the bank’s US economics team said Wednesday.
“Attitudes towards relations with the US have hardened considerably since January [and] the importance of the American market to Chinese exporters has shrunk from 19% of total exports in 2017 to only 14.8% in the first four months of 2020”, BNP went on to remark. “If negotiations run into difficulties, a critical flaw of the deal emerges, which is that there was no credible enforcer or binding legislation, only executive fiat”.
That’s a nice way of saying what I emphasized over the weekend in “‘The Stakes Keep Getting Higher’: US-China Cold War Likely To Continue Regardless Of Who’s President” – namely that markets always doubted the deal for a laundry list of reasons, not least of which is that both parties to the agreement (China and Donald Trump) are notoriously unreliable and prone to negotiating in bad faith.
“Recall that at the start of the trade war President Trump and his advisors argued that the relative strength of the US economy gave them an advantage”, BofA’s Ethan Harris writes. “Today, to some degree, the shoe is on the other foot: China has already weathered its bad quarter and second quarter data shows a significant pick-up in activity”.
On Wednesday evening in the US, the House passed the Uighur bill, opening the door to sanctions on Chinese officials (among other things) in connection with human rights abuses in Xinjiang.
The (proxy) vote was 413-1. Having already cleared the Senate, it now goes to Trump’s desk. He has not said whether he will sign it.
Computers and their algos don’t care that the trade deal might unravel or that US-China relations are melting down. No they just react to price action in the here and now.
So in periods where they are the most significant player in the stock market, they react to what the other models are doing and the price movement they engender.
So please join me in saying goodbye to the notion that the stock market is forward looking.
What a quaint old notion that was.
I’m surprised on this site there has been no mention of a Vancouver judge’s decision to smack down Meng Wanzhou’s defence to extradition to the US.
There has. I’m surprised you didn’t see it. https://heisenbergreport.com/2020/05/27/hong-kong-huawei-dramatics-play-spoiler-to-otherwise-bullish-narrative/
H-Man, the current situation looks more like gangrene . You hope the toes end the cutting but you worry when it moves to the leg.
The near term implications of US-China breakage are higher tariffs, less importing, and retaliation against the other country’s companies. (Let’s put aside tail stuff like military conflict, since the market isn’t good at discounting way out on the tails.)
Tariffs and imports are important, but at this particular point, they are way less important than other factors. Suppose, tomorrow, the market were assured that 100MM doses of an effective vaccine will be available in the US in November 2020. Investors would not give a hoot about tariffs on Chinese goods or whether US farmers get to sell soybeans to China. There’d be no rational reason to care about trade, until sometime in late 2021.
The risk of retaliation by China against US companies in that city only affects one of the FANMGs or whatever they are called now – that being AAPL. I think the trading in those few names is so index driven that such a risk isn’t able to have much effect until it is concrete.
That’s my explanation for why the market doesn’t really care about the US / China relationship breaking down.
I still can’t believe that there will be an effective and safe vaccine in a matter of months, what we hear is propoganda about a few different “possible” vaccines. We have gone from “there may never be a vaccine” and “ it will take 12 to 18 months” to trials already and a vaccine by the fall?! There is no way a vaccine can be tested properly that quickly, especially considering it is some new genetically modified RNA vaccine. I guess no coincidence that Fauci and Bill Gates are involved with the company?
Is it called “Operation Warp Speed”? Should be named “Operation Clusterfuck”
I don’t agree, but the point is that compared to things like “vaccine or no”, “consumers return to shops or no”, “another $2TR fiscal package or no”, the ups and downs of US-China trade are pretty minor potatoes. In the short term. Which is all that matters right now.
None of the above matter to the algos
After much hype (and, in some cases, misinformation), we’ve learned that hydroxychloroquine is more likely to hurt you than help you, remdecivir is far from a silver bullet, and the results from Moderna’s accelerated phase I trials are inconclusive. Inovio’s seems to be fading fast after getting out of the gate quickly and Novovax’s candidate hasn’t been given to humans yet. Etc., etc. I would put the chances of someone developing a safe vaccine for SARS-CoV-2 and having it widely available by the end of 2020 at no more than 5 percent.
It seems you have caught up with the esteemed Dr. Faucci who estimated as much earlier when he was allowed to speak. Promising in Vitro tests result in a 90% failure rate later on in testing in normal times. In these times we can expect a higher failure rate. The science is hard, antibodies have more ways to fail than succeed.
This is a good science-based overview (from Cornell) of where things stand. Recommend that everyone who is investing on the prospect of a qucik vaccine read it:
https://allianceforscience.cornell.edu/blog/2020/05/what-are-the-top-5-most-promising-covid-19-vaccine-candidates/
I’m following the science closely.
Here’s the politics of it, as I see things:
– China will discover and approve the Glorious Triumphant Peoples’ Vaccine (GTPV) by year end. It is a political imperative for Xi. China’s drug regulator answers to the Party. It has already demonstrated that political imperative to lead the medical charge against SARS-CoV-2 will overrule scientific rigor: China rush-approved hydroxychloroquine, lopinavir/ritonavir, and favipiravir to treat covid-19 back in February, based on nothing but anecdotals and tiny uncontrolled studies. And China has a history of tolerating dodgy vaccines.
– The US will not permit China to win the race for a vaccine, beating BARDA’s billions and Trump’s Project Warp Speed. What US President could bear begging China for doses of GTPV? The FDA is going to do what the White House tells it to do. Looking at the inexplicable actions of the CDC should leave no doubt that the politicians are in control. So the US will approve the Bigly Awesome Patriots’ Vaccine (BAPV) by year-end.
– The race for a SARS-CoV-2 vaccine is the new space race, the two superpowers are furiously firing off Sputniks and Geminis, neither is going to allow itself to be the loser. We burned astronauts up to win the space race, and we’ll wave away adverse effects and overlook middling efficacy to win this race. As for China, they may have to simply take the simpler route of fudging clinical data… they’re going to have a hard time doing clinical trials in China (having suppressed the virus too effectively) and domestic Chinese pharma doesn’t have any real experience conducting global multicenter clinical trials.
– When multiple vaccines are “approved” and hundreds of millions of doses are “just around the corner”, who’s the market going to listen to? The algos and bullish pharma execs, or nitpicky biotech hedgies whinging about p-values?