Echler Solomon Feng
Dec 04, 2018

A Ho-Ho-Hum Rally

What started as a tweet last January, and one that threatened to ignite a ‘potential’ full-blown trade war - is now ending nicely, even politely, with that much-anticipated dinner date between Trump and Xi just recently this first weekend of December in Buenos Aires.

However, even amidst the raucous noise & smoke that surrounds the G20, both Washington and Beijing remain mum on what really transpired when two of the most important leaders of the world’s largest economies sat down and shared an elaborate dinner – collaborate or collide? Opinions are divided. But most agree that everything has just been postponed.

What we know for sure is that both parties bought themselves more time - a three-month truce to the on-going trade war. China won another 90 days before punitive tariffs of 25% can be imposed on about US$200 Billion of Chinese goods from the current 10%. The US was able to muscle China to buy more American agricultural, energy and industrial products.

So, in a nutshell – what does this breather aim to achieve?

For obvious reasons, and given the timing of it all – what transpired between Trump and Xi is we believe laying the fertile conditions for a strong Santa Claus rally, given that we have a few more trading days left before the year ends. “The presidents want the markets to enjoy a Santa rally first,” said Junheng Li, founder of the China-focused research company JLWarren Capital speaking with Bloomberg. “And when February comes, we can start worrying again.” Although with the global market gyrations since the start of this week, that may be just wishful thinking.

The same sentiment is shared by Terry Haines, Evercore ISI head of political analysis. In his weekly memo to clients, he noted that “any strong market positive result is only short-term” and that over the past few days, “markets have been nursing hopes that a tariff pause of this kind would happen.” So, a staged skit is something the market is already expecting - to propel any illusory rally. He also added that this is not a trade war “ceasefire” if that is what everybody is touting.

“Neither side got their maximum demands, and it’s not the first time in the US-China relations that both sides claimed victory,” added Michael Pillsbury, a senior fellow at Hudson Institute. “Both sides avoided the worst-case scenario.”

That worst-case scenario is a year with markets ending badly. We suspect that if the dinner did not happen at all, the markets would have resumed their free fall – and that would mean portfolios and positions closing in the red. This Santa Claus rally is what Wall Street needs so they can report back to their shareholders that the year 2018 ended quite ---- not bad at all.

Just moments after dinner with Xi, and with a remarkable 53-page report already to hand, Trump was almost instantly making announcements that the immediate beneficiaries of this “truce” are American farmers, particularly those growing soybeans in the United States. This announcement was particularly helpful for Trump, and his possible ‘testing of the waters’ as he needs those votes in soybean states for re-election this 2020.

As Bloomberg noted, Trump hailed the “incredible deal” on Air Force One while heading back to the U.S., telling reporters with his trademark hyperbole that China will buy “a tremendous amount" of agricultural goods.

The Xi and Trump dinner was all for show, part of a Christmas narrative to make things lighter and appear better – at least in coherence with the spirit of the season. Wait for another 90 days, and come February, we will be back mincing words, ridiculous comments, and sharpened barbs amid the usual torrent of tweets.

This is how politics is played these days. On the more substantive issues like North Korea, Taiwan, The South China Sea, Nuclear proliferation and so on, not much was noted.

This is still the same bear market albeit dressed in Santa’s clothing.