US, China jawbone on trade, but markets aren’t taking the bait

Indices

In a remarkable show of restraint, markets have remained in the red despite positive noises on the prospect of reopening trade negotiations between Washington and Beijing.

US and Chinese officials are trying to sound positive on the odds their nations can reach an agreement on trade. It’s just the latest in a cycle of: sound positive > negotiate terms > back away from a deal > raise tariffs.

But this time around it seems markets are becoming wary of the rhetoric. Today, major indices are mostly in the red. Even the cautious optimism of yesterday’s early rise was quickly wiped out later in the New York session as traders thought twice about bidding up the major indices.

It could partly be exhaustion. The past month has seen the Dow gain or lose over 800 points in a single session on more than one occasion. 1,000 point swings are unusual, but not rare for the Hang Seng these days. Gold has seen movements in the region of 2%, while volatility for oil has produced swings of 5% in both directions.

The mystery phone call

On Monday, China’s top negotiator tried to calm fears ignited by Friday’s new tariff announcements. Vice Premier Liu He stated,

“We believe the trade war escalation is bad for China, bad for the United States and bad for the interest of the people in the world. We are willing to use a calm attitude to solve problems by negotiations and cooperation.”

Trump later claimed that “China called last night”, and strengthened the message by telling reporters at the G7 summit that “This is a very positive development for the world”. He later claimed “I think we’re going to make a deal”.

Asian markets trimmed losses and US and European stocks edged higher. But traders weren’t convinced.

Trump’s claim that there had been a phone conversation between officials from the US and China kept markets on the back foot. China’s Commerce Ministry declined to comment when asked by Reuters for confirmation that a call had taken place. While US Treasury Secretary Steven Mnuchin said the two sides had been in contact, editor of China’s state newspaper the Global Times, Hu Xijin, claimed that negotiators haven’t talked recently.

After being burned before, markets need something more concrete

It’s not that hard for an official to say that a trade war is bad and they don’t want one. Without confirmation of the key phone call, that’s all markets have to go on.

The major indices today are largely in the red, with the DAX heading towards a 1% loss and US futures pointing to a lower open. Traders clearly aren’t falling for the jawboning – if Trump or Beijing wants to calm market fears they’re going to have to offer up something a lot more solid.