An already jittery stock market has seen an uptick in volatility during the last week or so, and that may be due to the fact that the U.S.-China trade deal was inadvertently canceled on Monday, June 22, for a brief period of time.
During an interview with Fox News on the evening of the 22nd, senior White House advisor Peter Navarro responded to a question about the Phase I agreement by suggesting that it was “over.” Shortly after the airing of that interview, Navarro clarified his comments, saying that the Phase I agreement between the world’s two largest economies was still in place.
Since then, the American stock market has been particularly volatile, producing swings of nearly 400 points in the Dow Industrial Average on four of the six trading days that have elapsed since that interview was aired.
Given that the U.S.-China trade war has been at the top of the headlines affecting global stock market behavior in recent years, it seems fairly logical that market volatility would pick up on the heels of a story that the trade deal was essentially canceled.
Sentiments tweeted out by U.S. President Donald Trump in the wake of the Navarro interview don’t exactly instill a great deal of faith in the current U.S.-China trade detente, either. Trump tweeted on the evening of June 22, “The China Trade Deal is fully intact. Hopefully they will continue to live up to the terms of the Agreement!”
The meaning of those words takes an interesting complexion when one considers that China is most assuredly not living up to the terms of the agreement at present.
A key element of the Phase I agreement relates to China’s commitment to increase its purchases of American goods and services in 2020 and 2021.
But by all accounts, Chinese imports of American goods in 2020 are well behind the levels observed in 2017—the exact year entered in the Phase I agreement by which the Chinese were supposed to exceed (by a large margin) in 2020 and 2021.
While the deal may be fully intact at present, President Trump’s words appear to imply that may not be the case for much longer—especially if Chinese purchases don’t pick up quickly in the foreseeable future.
Broadening the lens on recent trade war developments, Navarro’s comments become even more intriguing.
That’s because Secretary of State Mike Pompeo had traveled to Hawaii for closed-door meetings with his Chinese counterpart only three days before Navarro’s interview on Fox News. Pompeo emerged from those meetings announcing that China had “recommitted” to honor the obligations they agreed to in the Phase I deal.
Given that Navarro suggested the deal was “over” only three days later, it makes one wonder what the Chinese really agreed to behind closed doors.
Looking at recent movement in the price of soybeans, which have long been the poster child of the U.S.-China trade war, it certainly doesn’t look like expectations are high for a meeting of the Phase I goals in 2020.
The price of American soybeans dropped roughly 24% from peak to trough as the trade war intensified in 2018 and 2019. Since the Phase I deal was signed in mid-January of this year, beans have only rallied about 6%—clearly not a panacea for American soybean farmers.
Ironically, soybeans were one American product in particular that the Chinese were buying in huge volumes before the initiation of Trump’s trade war. Chinese imports of American soybeans amounted to roughly 33 million tons in 2017.
That number dropped to 16 million tons in 2018, and remained at that level in 2019, but only because late last year the Chinese bought large volumes during the last two months of the year as a sign of good faith. Soybean prices were almost $12/bushel in the summer of 2016, when former President Barack Obama was still in office. They sit well below $9/bushel at present, and were as low as $8 at the worst moments of 2019.
Broadening the lens just a little further, complications in the relationship between the U.S. and China have multiplied in 2020 to say the least. The coronavirus pandemic, which is said to have originated in Wuhan, China, is of course one of the most prominent issues between the two, and has contributed to an intensification of negative rhetoric.
An ongoing spat between the countries over the treatment of the quasi-independent Chinese territory of Hong Kong has also ratcheted up tensions. As China has moved to increase its control over the former British territory, the U.S. has responded with statements and policies that appear to support Hong Kong citizens in their fight for continued autonomy.
At the start of June, Chinese leadership was said to be so infuriated with U.S. intervention in its internal affairs (i.e. Hong Kong) that it mandated yet another freeze in American soybean purchases.
That’s not the type of behavior one would expect from two countries theoretically working to put in place a broad-reaching, bilateral trade agreement.
Along those lines, negotiations between the two countries on the second phase of the agreement appear to have stalled for the time being. Given that Forbes published an article titled “China Phase One Trade Deal Looks Mighty Dead,” the word “stalled” might be too kind.
But there may be a reason the Chinese are dragging their feet when it comes to further negotiations.
As most are well aware, the United States will conduct a presidential election in November, and the Chinese may simply be waiting to see where the chips fall in that contest before making their next move. It’s anyone’s guess at this point how former Vice President Joe Biden would steer relations with China if he were elected into the nation’s top office this fall.
As for President Trump, if he wants to appear “tough” on China, there might be no easier method of sending that message than by officially canceling the Phase I trade agreement. If the Chinese aren’t abiding by the agreement, what would truly be lost by dismissing it?
It’s virtually assured that the Trump campaign is strategizing on this very topic right now.
On the night of Monday, June 22, Dow Jones Industrial Average futures dropped over 400 points after Peter Navarro suggested the deal was “over.”
That makes one wonder by how much—and for how long—global market indexes would plummet if Trump were to officially cancel the deal.
To learn more about the intersection of politics and the financial markets, readers may want to tune into a new installment of “The Political Trade” podcast featuring former MSNBC host Dylan Ratigan and Luckbox publisher Jeff Joseph.
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Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to email@example.com.