China puts Trump on a trade war back foot
Donald Trump has a major problem. He uses the stock market as a proxy for his own presidential prowess, but his trade war could put the gains seen since he won the Oval Office at risk. Many observers have noticed a pattern in the presidential announcements. Each time the market falls, he tweets some positive news on discussions with China to reverse its course. However, the effect of these market interventions is now starting to wane, resulting in the S&P 500 falling almost 4pc in August. Has the president now overstretched himself and put his own re-election at risk?
Markets participants have called these interventions the “Trump put”, because they act in a similar way to a put option that pays out when an asset price falls to a specific level. In derivative trading, a put option is a potentially valuable hedge if a bullish bet on an asset goes wrong. Unfortunately, as both Beijing and Washington dig in, it looks like the Trump put has now started to expire. Market observers have been fairly sanguine about the trade war because they believed that any meltdown in equity markets would moderate the president’s trade-war tactics. It really isn’t a secret that president Trump wants a buoyant stock market next year to help propel him back into the White House. This is why there is constant pressure on Jerome Powell to cut interest rates. The president has even asked in a tweet whether the Federal Reserve chairman was a bigger “enemy” than Chinese president Xi Jinping because
he won’t do his bidding and slash rates to put rocket fuel under equity markets.
One example of the Trump put was seen this week. Markets went into a tailspin last Friday after China said it would implement retaliatory tariffs on $75bn (£62bn) of imports from the US, and the president responded in his usual petulant manner. President Trump tweeted that the US didn’t need China, and that he “hereby ordered” US companies to bring manufacturing operations home.
But, over the weekend, he appeared to grow concerned about the market response. On Monday, he tweeted that China had telephoned “our top people” on Sunday evening to “get back to the table”. Markets bounced but, unfortunately, China denied that any such call actually took place. President Trump stretched the truth too far in this intervention and it is likely to mark the beginning of the end of the Trump put.
One other big mistake came on Aug 13. This was the day that tariffs on electronic products were delayed from Sept 1 to Dec 15, which president Trump said was to avoid hitting US shoppers this Christmas. The delayed tariffs were on goods that are substantially imported from China and include mobile phones, laptops, monitors, game consoles, some toys and LED lamps. This was a mistake for two main reasons.
The first was that it contradicted the president’s oft-repeated claim that it was China that paid the tariffs and not US consumers. The second problem was that it underscored to the Chinese just how much the president gets upset about any fall in equity markets. It highlighted a major weakness.
China is now in a relatively good position. Key data indicate that the trade war is having a minimal impact on its economy. Recent trade data was better than expected.
Exports rose in July, defying expectations of a fall, while imports fell by less than predicted, indicating the economy remains resilient in the face of the US attacks. From January to July, China’s trade surplus with the US was $168.5bn. This is the outcome that Trump was keen to avoid. Donald Trump has more to lose now than Beijing and he made this very clear in his tweeting pattern.
Of course, the most sensible and bullish Trump put would be for the current administration to end the tariff campaign and sign a trade deal with China soon. However, if markets do start to fall, China may be happy to prolong the dispute and damage his re-election chances. It really does look that China is now in pole position in this protracted trade dispute.
‘Trump wants a buoyant stock market to help him stay in the White House’