Veteran traders couldn't help but laugh when they checked US equity futures last night and saw that - as some probably had suspected they might - Dow futures were tracking for a 100-point jump at the open. With so much emergency liquidity still sloshing around the financial system, it seemed the most near-term risk many could fathom was a probable spike in new coronavirus infections in the coming weeks, hardly an imminent, overnight risk.
But the ramp quickly faded after a Bloomberg report hit according to which showing Beijing had just given the US-China 'Phase 1' trade deal - which has been essentially moribund for weeks now even though President Trump spared it on Friday - one more 'kick', reminding investors where the real near-term macro risk lies: That is, the light-speed "decoupling" of the world's two largest economies.
Spare us the commentary about how markets are more concerned with these trifles than the looting-and-burning-and-pillaging unfolding across the US - we warned investors about these risks last night. It appears investors are only just waking up to them, however.
In short, reports about Beijing halting some US farm imports have rattled investors, and sent the Chinese yuan traded on- and offshore lower on the day.
The decision appears to be the first part of China's "retaliation" against the actions announced by President Trump on Friday, as well as the increasingly belligerent posture taken by his administration in the aftermath of the coronavirus outbreak. China's Ministry of Foreign Affairs accused the US of undermining bilateral relations, and said it would meet any U.S. action with “firm counterattacks”
Perhaps the most obvious "hint" that China would choose the trade channel as its preferred means of retaliation came late last week, as we reported on surging demand from China for Brazilian soy products, a major competitor for US soy.
So far, the reaction has been relatively mild in equities and equity futures. But we suspect more headlines about China's reaction to the latest restrictions on Chinese nationals working and studying in the US, announced by Trump on Friday, will hit the tape later in the day.