This Evening's Log Entry

8/13/19 Tuesday

Just as the market appeared to be fading (this morning) what looked like your classic snap back rally during a corrective phase lower, the White House announced that it was making some exceptions to the "no-exceptions" 10% tariff on the balance of all Chinese imports. Apparently some items will be exempt, and others won’t get hit with the tariff till 12/15.

U.S. headlines suggested it was the President bowing to pressure from the business community, and to evidence from the data that the trade war is doing some serious economic damage.

Chinese headlines this evening have a different take. According to China’s state media, their lead negotiator took a call from Mnuchin and Lighthizer this morning and really laid into them on the new tariffs; inspiring them to back off.

As I’ve been suggesting herein, China has hardened markedly of late. 

Now, regardless of how the phone call went down this morning, China is definitely presenting the situation to their own populace as proof that they now have the U.S. on the back foot.

Here’s an example from China’s state-controlled Global Times publication this evening:

"The US has realized that its maximum pressure strategy to force China back to the negotiating table has not worked as expected. Washington knows that only through talks can the two sides reach a deal," Wang Jun, chief economist at Zhongyuan Bank, told the Global Times on Tuesday.

"Trump is looking for a way out. It also shows that both China and the US are highly dependent on each other, and the practice of imposing tariffs does not necessarily bring China to its knees," said Liang Qi, a professor from Nankai University.

Liang then added that "we also can see that imposing tariffs may harm the interests of the US, making it hard for Trump's re-election"

Personally, I was looking for China’s ultimate response to show up in the nightly (our time) yuan “fixing”. For the past 6 evenings I’ve been watching my futures charts at precisely 6:15 pm (pdt); that’s when China sets the mid-point for the yuan vs the dollar. Tonight, for the sixth night in a row, the yuan was fixed at more (weaker) than 7 to the dollar. The last time the yuan was that weak was during the 2008 recession. The recent move back to 7 was viewed as “currency manipulation” by the U.S.. 

I figured that a fixing in the high 6s tonight would be a signal that China is ready and willing to come back to the table, maybe even with some concessions. Well, nope, the PBOC remained stubborn this evening with a 7.03 fix.

Initially, per the red circle below, the S&P future contract spiked higher, as supposedly traders expected a 7.05 -- which I found curious, given today’s developments. But, as you can see, in short order, they realized that this is anything but a signal that China's about to back down.



Now, all that said, the real test is going to be whether or not China resumes the purchase of soybeans, etc. from the U.S. over the next few days. If not, you can absolutely bet that Trump is going to receive huge push back at home (probably will anyway), with accusations that he’s caving to China.

Don’t know that he’ll be able to weather that kind of criticism (let alone this evening's depiction in the Chinese media), particularly at this juncture. If he can’t, and if, therefore, today’s softer approach proves short-lived, look for more market pain on the forthcoming tweet that says he’s going 25% come December 15th.

In any event, until both sides come together with a deal that eliminates all the tariffs imposed over the past year, followed immediately by strong evidence that Trump has no plans to use tariffs as he works through perceived issues with our other trading partners going forward -- notwithstanding the huge rally that will occur on a China deal -- the longest expansion, and bull market, in U.S. history will remain in grave danger...

Newsflash: Ironically, as I finish up, S&P futures are suddenly catching a huge bid:



Here's why; from LiveSquawk's (CNBC) Twitter feed:

"China Is Sticking To September US Trade Talks After Tariff Delay"

Throw in a few tons of soybeans and we'll really see stocks rally!