This guest commentary was written by Mike O'Rourke of JonesTrading.
Last week closed out with market participants having a front row seat as the leader of the free world became unhinged because of the trade war. We were genuinely concerned the news combined with the slow pre-holiday trading could make the equity market vulnerable to a crash.
A crash of sorts occurred, to the upside.
The S&P 500 has advanced 2.7% in four trading sessions as we head into a weekend where 15% tariffs will be levied on approximately $110 billion of Chinese goods. The first leg of the rally commenced on Monday due to what is widely accepted as misleading optimistic statements about “phone calls” discussing trade between the US and China. Today’s rally occurred at 3am EDT due to comments at a China’s Ministry of Finance and Commerce weekly press briefing.
The Ministry of Commerce’s spokesman Gao Feng stated, “China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war.” When asked whether China would retaliate he provided the same response.
It was also noted that Gao echoed Vice Premier and Chief Trade Negotiator Liu He’s statement at a trade show Monday stating China is “willing to solve the problem through consultation and cooperation with a calm attitude, but firmly opposes escalation of trade war.”
This has all theoretically been translated by the market to means the icy negotiations are thawing. What is being missed in these hopeful interpretations, is that the chasm between the ideological differences of the two sides is so vast it is unlikely to be traversed. One side needs to relent significantly.
When Liu spoke earlier in the week he was at a trade show. Of course, his rhetoric would be mild. Imagine President Trump were speaking to the American Farm Bureau this week, it is not the venue for fiery trade rhetoric.
That said, every escalation has originated from the US side, so of course Liu opposes it. China sees each of its moves as matching, and less severe than the corresponding US escalation. President Trump’s regrets over the weekend prompted him to misstate the level of communications early in the week. China likely saw that as an opening by an adversary who relented twice in the past two weeks (December 15 delay, Huawei waiver extension) while receiving nothing in return. There is no reason for Gao to provoke him three days prior to another round of tariffs being implemented.
If President Trump relents for a third time in three weeks, then the trade war might as well be over. It would make it clear the US holds no cards and the threats are empty. It would be surprising to see Trump cave again here, but that is the only justification for this behavior.
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.