Close Encounters.

Risk assets rebounded Tuesday after a close encounter of the Navarro kind roiled markets, forcing Donald Trump’s second-most abrasive adviser (the first being Stephen Miller) to recant just minutes after telling Fox News that the US-China trade deal is “over”.

Trump himself was compelled to deliver a late night tweeting refuting Peter’s comments which he says were “taken wildly out of context”.

It’s debatable whether Navarro was, in fact, taken “out of context”, but if you can somehow suffer through the entire interview (no easy task), it’s clear that Peter doubts the viability of the agreement. The insults he hurls at John Bolton are almost as amusing as they are juvenile. The China trade remarks come at the ~5:00 mark.

Not everyone thought this was forgivable. Former trader Richard Breslow called it “utterly irresponsible” in his daily missive, for example.

“Out of context or not, it’s on a spokesman to speak clearly”, he wrote, adding that “for people who are so intrinsically involved with how asset prices will take their every word, they don’t seem to know the very basics of Trading Room Communication 101”. Here’s a bit more from Breslow:

It’s hard to tell, with each episode, what is the cause. Whether it’s frustrated and angry people trying to prove their virility, people who don’t respect the markets having a bit of fun, or sheer incompetence, I doubt we will ever fully settle the matter. What is equally disturbing, is the number of people who argued, after the fact, it was no biggie. Everything came back pretty quickly. S&P 500 futures don’t have a 70 point range because algorithms are just having a lark. Those who claim it was simply another dip-buying opportunity, truly don’t get what this is all meant to be about. Or what can be at stake. No matter your view of things, needing a late night tweet to save the stock market shouldn’t possibly provide any comfort.

No, it shouldn’t. And, as noted on Monday evening, Navarro’s remarks were most unnerving for the extent to which they reminded everyone that it won’t take much to upend the entire narrative anew.

For now, though, Navarro has been admonished. Both by markets and, presumably, by Trump and Bob Lighthizer. Next time Peter will be more careful. (No he won’t.)

Perhaps the funniest thing about Navarro’s “mistake” is that he was really just telling the truth, both about a lack of trust and about the state of the trade deal, which he has never been particularly keen on, his allusions to the great accomplishments of “President Donald J. Trump” (Peter always refers to him with his middle initial) notwithstanding.

Nobody believes the trade agreement is intact or that it was ever going to be implemented in the first place. The only question is whether Beijing buys enough agricultural product between now and November to pacify Trump’s “great patriot farmers”, whose suffering over the course of the last three years is well documented, both at the aggregate and individual levels (see here, for instance). Rabobank’s Michael Every had to the following to offer:

Today we got a taste of things to come when White House China hawk Peter Navarro stated to the press that the US-China trade deal was “over”. Cue a plunge in stocks and in CNY and in bond yields and general risk off. Then cue the inevitable rapid winding-back of those comments from Navarro and Kudlow and Trump, with the former saying his comments had been taken “wildly out of context” (they hadn’t given he was talking about the total collapse of US trust in China) and the latter tweeting “The China Trade Deal is fully intact. Hopefully they will continue to live up to the terms of the Agreement.” The problem is that this upbeat assessment is also wildly out of context. There appears no realistic way China is either willing or able to stick to the deal’s terms.

In any case, markets will now pivot back to the reopening story, which is still viable in the US, but becoming less so seemingly by the day. Larry Kudlow’s “small bumps” have turned into “hot spots” and if you ask Texas, the rate of infection and hospitalizations is now at an “unacceptable” level.

PMIs will presumably shed a bit more light on the state of the economy, to the extent you think anything useful can be gleaned from PMIs at a time like this, a debatable proposition, to be sure.

It’s worth noting that in the event trade tensions do become the story again, it could well slam the brakes on any assumed downtrend in the dollar, and that would be bad news for risk assets from equities to oil.

“The reassuring comments triggered a quick reversal of US dollar strength”, MUFG said Tuesday, of Navarro’s retraction and Trump’s “it’s still intact” tweet.

“We expect limited further fallout with Trump expected to remain committed to the phase one trade deal in the run up to the election, [but] last night’s price action does highlight that the FX market remains sensitive to trade policy uncertainty”, the bank went on to say. “It remains a potential trigger for higher volatility”.

Indeed it does. That’s probably an understatement.

“The challenges now are very much related to the direct economic effects of the pandemic rather than market liquidity and market disruption”, SocGen’s Kit Juckes remarked in his Tuesday missive. “The story varies and varies most of all between developing and advanced economies”, he added, noting that “how that affects developed markets will determine whether the dollar is making a smooth turn lower or a very messy multi-month top”.