With traders and algos expecting a calm quad-witching Friday, which was pinned by billions in option orders at SPX 3,000, stocks slumped in the afternoon following reports that trade talks with China had derailed once again, when first Trump said that he wasn't looking to do a partial, agri-focused deal, followed by reports that China had canceled its trips to Montana and Nebraska, telegraphing that yet another major hurdle had emerged ahead of the October senior level trade talks.
As a result, even though S&P 500 algos were desperate to pin the market around 3,000 - thanks in large part to the massive gamma from quad witch, they failed after the China news.
Predictably, as stocks sold off, odds of a trade deal tumbled as well:
However, in retrospect, this risk off/selloff may have been premature because as the NYT reports today, "the delegation of Chinese agriculture officials that had planned to travel to Montana and Nebraska in the coming week didn’t cancel the trip because of any new difficulty in the trade talks" according to sources, and "instead, the trip was canceled out of concern that it would turn into a media circus and give the misimpression that China was trying to meddle in American domestic politics."
Which is ironic, because it is hardly a secret that China is eager to delay the core of trade negotiations until after the 2020 elections, so as to avoid haggling with Trump while he is still president. Of course, by doing so China is indirectly "meddling" in domestic American politics, but for the sake of narrative let's ignore that and focus on what the NYT reports, namely that "the Chinese government has long taken the position that countries should not interfere in each other’s domestic affairs, a position developed partly in opposition to foreign criticisms of China’s human rights record."
As the NYT additionally reports, both sides moved on Saturday to indicate that the negotiations continue, and points out that according to China’s state-run Xinhua news agency, fairly senior negotiators had “conducted constructive discussions” in Washington in recent days and had “agreed to continue to maintain communication.”
The tone of the Xinhua statement was matched by a separate statement from the United States trade representative in Washington. “These discussions were productive, and the United States looks forward to welcoming a delegation from China for principal-level meetings in October,” the statement said.
Both sides’ trade negotiators have continued to look for a resolution of their differences even as tensions ratcheted ever higher over the summer, several people familiar with the trade talks said. All insisted on anonymity, citing diplomatic sensitivities in the negotiations.
Despite this attempt to ease some of Friday's concerns that trade talks are again on the verge of derailing, the question now is whether China's Vice Premier Liu He can make any progress when he comes to Washington for high-level talks next month: "While the dates for those talks have not been confirmed, they look likely to be scheduled for Oct. 10 and 11, said two of the several people familiar with the trade talks."
More importantly, the NYT notes that "the biggest obstacle facing negotiators may be agreeing on the scale and ambition of any deal they try to reach", with the gray lady citing "several people familiar with the trade talks" who said in interviews over the past two weeks that China wanted to reach a partial deal that would head off President Trump’s planned increases in American tariffs on Chinese goods on Oct. 15 and Dec. 15.
Then again, Trump made it clear during a press conference on Friday that a partial deal is a non-starter for him, which in turn means that Beijing may be forced to adjust its approach: “I’m looking for a complete deal, I’m not looking for a partial deal,” Mr. Trump said on Friday during a joint news conference with Prime Minister Scott Morrison of Australia. “We’re looking for the big deal.” This is a problem because according to the NYT report, "China has become more wary in recent weeks of seeking any comprehensive resolution of the dozens of issues facing the two countries."
Chinese negotiators have tried to focus the talks on issues that can be resolved through regulations that the country needs to issue by early January anyway in response to a new law on foreign investments the National People’s Congress approved in March.
At the same time, Chinese trade negotiators have tried this week to exclude issues like data flows, the location of data and the setting of cybersecurity standards. In short, China is hoping to have no agreement on the issues that truly matter for a credible deal, for one simple reason: Beijing is completely unwilling to budge on any of these topics:
These issues tend to infringe on the turf of China’s feared internal security agencies, which have resisted any limits on their ability to conduct comprehensive surveillance within the country and are wary of allowing in American tech companies.
Meanwhile, the United States has tried to persuade Beijing to adopt broad changes to Chinese laws to make the country more open to imports and to limit subsidies for industries, particularly advanced manufacturing industries that compete with American industries.
So while the lack of Chinese trade negotiators in Montana and Nebraska may not be catastrophic for a future trade deal, it certainly looks unlikely that the two sides can meet in the middle... at least for now, absent a major market shock. It is hardly a secret that as the S&P rises, and remains just shy of all time highs, Trump's willingness to compromise fades at least until the S&P drops to 2,800 or below at which point the president starts offering concessions, rinse, repeat.
So SPX goes back to 3050 where Trump announces 100% tariffs on all China imports then plunges to 2800 and Trump says all tariffs are delayed. Repeat as necessary— zerohedge (@zerohedge) August 19, 2019
The two sides have nonetheless undertaken a series of small, confidence-building trade measures in the past two weeks. Each side has removed tariffs from a series of items, like Christmas tree lighting sets from China and pork from the United States. China has also agreed to purchase some soybeans this autumn.
Will that be enough? The answer will be revealed in a three weeks when senior US and China negotiators come to Washington on October 10/11.