The Real China Question

When the chips are down, threaten China and hope for the best next week. Is that what's left for Trump's mid-term election strategy? The wild ride in markets continues as the focus increasingly turns away from the economy and towards the brewing trade trouble. The New Zealand dollar bucked the risk aversion trade to lead the way Monday while the Australian dollar lagged. A new index short was issued 1 hour before the close of the US stocks session. The Premium video is ready to lay out the rationale.

It continues to be all about stock markets as the S&P 500 rose 2% in early trading Monday then fell more than 2% into negative territory before bouncing late to finish down 0.66%. Through it all, the FX market continued to have far less responsive volatility than the historical norm. USD/JPY traded in a 30 pip range with the S&P 500 trading in a 100 point range.

That continued divergence in volatility argues against economic worries or rates as the primary catalyst for the worries. Surely they're part of the story but the price action Monday highlighted other concerns.

The first round of selling came after UK Chancellor of the Exchequer Hammond announced a digital sales tax aimed a very large internet commerce companies. That led to some selling in technology companies. The heavier selling came after a Bloomberg report saying Trump is considering announcing tariffs on all remaining Chinese goods in early December if talks with Xin on Nov 30-Dec 1 don't produce any results.

Within the same theme, we seem to harken back to the speech Pence made on October 4 where the shockingly aggressive tone continues to reverberate in China with op-eds deconstructing it daily in China.

Former Australian PM Kevin Rudd recently gave a speech on the US-China question and it helps frame the debate. The market is trying to understand if the US is simply trying to discipline China into following international norms more closely, or if this is the start of a strategy of full-blooded containment and a comprehensive economic de-coupling.

The market was initially comfortable with the idea this was typical Trump grandstanding and tough talk that would end in concessions and a deal but after Pence's speech and the 10% tariffs that escalate to 25% at year-end, a switch has flipped. This may be the start of an aggressive US effort to undermine China's expansion, influence and growth.

That will be the frame in which the story unfolds.