Over the weekend, financial markets were confronted with 2 pieces of news. The first, a tweet from President Donald Trump as follows.
I have asked China to immediately remove all Tariffs on our agricultural products (including beef, pork, etc.) based on the fact that we are moving along nicely with Trade discussions….
— Donald J. Trump (@realDonaldTrump) March 1, 2019
The second, a headline from WSJ sounded very different.
So, is there a deal or not? Will President Trump meet with President Xi in less than a month’s time and sign over a couple of papers and signal the US China Trade War to be over?
Let us make it clear who thinks that there is going to be deal. Bloomberg. Reuters. CNBC. CNN. TIME Magazine. FORBES. Virtually every single major news network as well as your local mamak tea stall operator says that the “US and China are very close to signing a deal.” By the way, they were close last week, and they are very close this week.
To be honest, every indication was that this particular deal was considered to be “in the bag” on Friday. That is of course the opinion of many fund managers and short term traders. But I believe a careful reading of the news actually reveals that there is no deal, tariffs are going back up to 25% and we will not only see a trade war, but a military conflict between the US and China within the next 2 years.
The reason is that President Trump’s tweet carries more weight that the Wall Street Journal’s article. The WSJ article is considered a defensive leak by US trade negotiators – meaning that it is intended to protect the progress made so far in the negotiations. The US trade negotiators knew fully well that there was no way China was going to agree to remove agricultural tariff’s immediately so they wanted to “front run” the President by giving the idea that the deal is almost done. This is to make it difficult for President Trump to suddenly flip and declare that there is no deal between the US and China.
Now, why would the President suddenly flip? There are two reasons.
The first is that this was created by the Chinese themselves which wanted to make Trump look very weak by agreeing only to a watered down deal by dragging out negotiations. This is because I doubt Vice Premier Liu He has the necessary clout in China to actually get everything across the board. By the way, Prime Minister Li Keqiang asked the Chinese citizens to brace themselves for tough times during yesterday’s Central Assembly Meeting of the Chinese Communist party.
The second deals with the Trump flip. If recent history is used to gauge the probability of Trump changing tract in mid air, it is as not being as remote as being priced in the financial markets. For example, President Trump walked out on the North Korean delegation during their summit in Vietnam, citing disagreements with Kim Jong Un’s position, even though his chief intelligence officer had warned him prior to the summit not to expect the North Koreans to drop their nuclear arms program.
Another more sinister motive is that the President thrives on chaos and removing the US – China threat so early in the run-up to the Presidential re-elections will remove a major campaign point. Also, there is the spectre of a new Congressional investigations led by the Democratic controlled House Judiciary Committee that could make it more likely for President Trump to face impeachment. The issue that bothers President Trump is not really the stock market, but Mueller, the FBI, the Russia probe and with that, not only the possibility that the President may be impeached, but that he will spend the rest of his life behind bars.
So the President has one of two alternatives. Play nice, go along with the China deal, and perhaps adding a 1,000 points to the Dow Jones Industrial or, put in place the elements that would lead to an open clash between the US and China in 10 – 12 months down the road.
If you consider his latest Tweet on the matter, it is clear that the President is not intending to go through the motions and sign whatever is front of him. In fact, his stated demand is in contradiction with China’s position as reported in the Wall Street Journal article. President Trump asked/demanded the Chinese to drop all tariffs on US agriculture exports in consideration of his decision not to impose an additional 25% tariffs on Chinese exports on March 01, 2019, when the Journal’s article revealed that China has agreed to reduce the tariffs on US imports once Washington removes the tariffs on Chinese imports, and that as part of the trade deal and not a gesture of goodwill.
So where does this leave us?
At the time of writing, Dow Jones Futures are strongly in the green, indicating an open of 26,135 as market participants ignored the Tweet and reacted to the WSJ article. We expect the index to be down 1,000 points by mid-March, as Trump will make clear that he is not going to sign the deal that is in front of him and instead directs additional tariffs to be employed.
UPDATED 8 MAR 2019
Rembau Times is spot on. Dow Jones Futures as of 8 Mar 2019 @ 1030 pm was 25,200 almost 1,000 points lower than Monday when we made the call. US Ambassador to China warns that no date has been set for US China meeting. This was the toughest call we made but currently we are proven correct.