One Trader Warns, Beware Of ‘Thawing’ US-China Trade Tensions

Mnuchin unleashing The Plunge Protection Team, hopeful headlines (and tweets) around US-China trade tensions, and a seeming calm that shutdown-driven government-gridlock is a buying opportunity has prompted one of the most ferocious short-squeezes in recent years.

Market participants, comforted by the epic rebounds in their most-favored stocks, are proclaiming – just like Trump – that the market had a “glitch” in December and everything is once again awesome.

However, as traders cross their fingers and shift strategic focus to ‘hope’ that tomorrow morning’s headlines on US-China relations will prompt the next leg higher in stocks, former fund manager and FX trader Richard Breslow has a warning that most will ignore – a tariff thaw could in fact cause the most pain for already hurting markets.

Via Bloomberg,

There aren’t a lot of things that the various governments around the world agree upon. We see evidence of this every day. And it can’t always be put off to the general coarsening of modern discourse. But there is one thing they have all seemingly come around to realize. They can’t afford to have the global economy grind to a halt. The natives are just too restless and their political survival depends upon it. Nothing motivates them more.

It remains to be seen if a kinder, gentler approach to international cooperation, promotion of fiscal stimulus and a continued free pass on over-leverage and deficits is even achievable, let alone maintainable. But you do get the sense that, for the moment at least, there is an understanding of the imperative to give it a try.

Should they be willing and able to attempt this alternative and, for them radical, approach, there just might be a period where the citizenry and commentators remain skeptical and angry, but asset prices do just fine. It’s ironic, but that could be the “pain” trade for the beginning of the year.

[ZH: Ironically, as hope rises in stocks, the bull-baiting surge in market-implied dovishness has been erased entirely…will US-China trade tensions thawing “good news” be just the “bad news” the market needs to reinvigorate Fed hawkishness and slumping stocks?]

There is no shortage of potentially troubling items on the global calendar with which markets will have to contend. But anyone thinking it is a prudent strategy to merely line up a series of “stacked trades” is playing with fire. The only way to position for that in advance is to have hedges in your portfolio. Whatever your view, you need something you can buy or sell, as the case might be, when you perceive temporary extremes. But you can’t do it at the risk of changing the entire alignment of your investing expression.

It is a perilous practice to just orient your trades to possible bad news down the road. That can prove, as we have seen time and time again, to be the equivalent of the ultimate negative carry trade. Similarly, a nothing-can-go-wrong approach is equally irresponsible folly.

It’s understandable to be dubious about even the possibility of a timely, and lasting, resolution of the trade dispute between the U.S. and China. But traders have never shown much difficulty in going with the flow as the can is kicked down the road. And it appears that both countries feel a renewed motivation to tone things down. We’ll have to see how that goes. But we know from its latest actions just this week, that China realizes a critical necessity to stimulate an economy that no one thinks is going strong. And the U.S. side puts an inordinate stress on the level of the stock market.

PBOC Governor Yi Gang said this morning that they will be offering a new medium-term lending facility later this month and, more importantly, that there must be a balance between development and risk-prevention. So much for deleveraging being the primary objective. But what really got Chinese equities’ attention were comments by NDRC Vice Chairman Ning Jizhe that the government would be rolling out measures to stimulate automobile and appliance consumption.

Adding to the positive mood, it was reported by Bloomberg News that President Trump is increasingly eager to strike a deal with China in order to “perk up financial markets.”

We’ll see what happens but before then I want to see the FOMC Minutes and any discussion of financial conditions. Just how worried, if at all, were they at the time. And it will be a good introduction to the heavy slate of Fed speakers scheduled for tomorrow.

I have to say, I can argue both sides to my own satisfaction of whether a Powell put exists or not. And while we are waiting, after this recent rally, U.S. stock indexes are coming close to important resistance levels.

Now we could get some sense whether we have been in a correction or prices are poised for a renewed move higher. WTI breaking back above $50/bbl isn’t hurting.