The guest commentary below was written by Mike O'Rourke of JonesTrading.
It is becoming readily apparent that China’s Global Times editor Hu Xijin is China’s Twitter counterpart to President Trump.
It is a fair assumption that most world leaders see it beneath their office to engage the public on Twitter in the manner President Trump does. One would expect President Xi to be such a leader. Hu Xijin (@HuXijin_GT) has turned into the perfect Twitter surrogate for the Chinese Government.
You may recall that when Treasury Secretary Mnuchin’s and USTR Lighthizer’s last meeting in Beijing wrapped up on May 1st, Secretary Mnuchin tweeted that the talks were “productive.” Then CNBC reported that a trade deal was “possible” by the following Friday, May 10th. This positive spin occurred after China had begun to reverse course on Mnuchin and Lighthizer. The negotiations were already in grave jeopardy.
On May 2nd, China’s Global Times raised serious doubts reporting that “Unlike previous rounds of negotiations between Chinese and US trade officials, the latest meetings in Beijing, which ended on Wednesday, had fewer details about specific discussions and results. That left many to wonder whether the two economic powers have hit an impasse in the tough talks and whether a trade agreement that would end their yearlong trade tussle is still within reach as it had appeared to be.”
Retrospectively, those doubts were far closer to the truth than anything reported in the US media or conveyed by the US government.
Although Hu Xijin is not exactly going tweet for tweet with President Trump, he is sharing his (China’s) perspective multiple times a day. Early this morning, he tweeted, “The US side released some signals to ease the situation these days. It dare not play rough to the end. What it's doing is threatening China while propping up US stock markets, keeping up the hope there will be a deal finally. The Chinese have seen this through.” He certainly zeroed in on President Trump’s Achilles' heel, the stock market.
Several hours later, he tweeted, “ In Chinese internet, many people describe the current China-US tussle as The Art of the Deal v.s. On Protracted War. The latter was written by Mao Zedong in 1938 during China’s anti-Japanese war. Protracted war is well known among Chinese as a strategy to exhaust opponent.”
As we noted last week, taking a knee and running out the clock on President Trump is the smart strategy. The Trump Administration is clamoring to schedule another round of meetings. If China agrees to a meeting, the US equity market will rally, thus weakening China’s hand. Therefore, China should reject such a meeting. Imagine the repercussions if they do so publicly.
The propaganda on both sides is robust and not to be trusted. Misinformation and misdirection are key elements to the conflict. For these reasons, markets historically trade at a discount when geopolitical uncertainties arise. The current bubble atmosphere only sees the bright side of the issue, rallying on words like “constructive” and “productive.” At best, those words are misleading and at worst, those words may be lies.
The computers and passives are not making qualitative decisions about risk. Properly functioning markets send assets lower on bad news and bad decisions. Today, the market rallied sharply on the postponement of a bad decision to place tariffs on European Autos for 6 months. A two fronted trade war would likely be disastrous. Americans should consider themselves lucky that it will be avoided for now, but it is not a reason to increase risk exposure.
Lastly, there has been ample speculation about whether or not China will sell its holding of US Treasuries and create some type of market disruption. Of all the things about which the US market should be concerned, this should be very low on the list. China cutting off communications with the Trump Administration would be far more disconcerting. It would place China squarely in control of developments (or the lack there of). The Federal Reserve holds nearly twice as many Treasuries as China.
For our part, we wish the Fed would sell its Treasuries at these artificially inflated prices. With the ECB and BOJ keeping their interest rates at zero or in negative territory, the only person who loses in a Chinese fire sale of US Treasuries is China. There will be more than enough buyers to scoop them up at discounted prices, and there always seems to be a western government around who is willing to buy them.
This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.