Rabobank: "One Day The Main Story Will Not Be US-China Relations... But Today Is Not That Day"

Submitted by Michael Every of Rabobank

One day, perhaps soon, the main story in the Daily won’t be US-China relations – again. But today is not that day.

Not when we see the editor of China’s Global Times, their version of the British Daily Mail, tweet “I am asked a lot recently: Will a war break out between China and the US? My answer: The two countries increasingly dislike each other, various conflicts are rising, therefore, risk for a military clash is increasing. But meanwhile, they both don’t want a war. Am I right?”

Not when US President Trump gives a TV interview in which he muses "There are many things we could do. We could cut off the whole relationshipto save USD500bn, and that he does not want to speak to Xi Jinping right now.

Not when the Global Times counter-response is to ask “Is Trump totally insane?” for wanting to cut ties (and adding “Yes. And it is not China but the US who will suffer more”). This in an article that quotes a number of Chinese academics understandably excoriating the US president, but also including Jin Canrong, the associate dean of Renmin University of China's School of International Studies in Beijing, who states China has nothing to be afraid of as "in the past, we didn't solve the Taiwan question because we wanted to maintain the China-US relationship, and if the US unilaterally cuts it off, we can just reunify Taiwan immediately since the Chinese mainland has an overwhelming advantage to solve this long-standing problem." So it appears there are many things China can do too(?)

Not when in Hong Kong we have just seen an apparently unconstitutional parliamentary procedure to place a pro-Beijing lawmaker in charge of selecting a new Chair on Monday (because “this is a very special situation”), breaking the political impasse, ending an opposition filibuster, and possibly opening the door to both the rapid passage of controversial national security legislation and/or more mass street protests.

Yes, Hong Kong is so 2019. Yes, this is The Global Times. Yes, this is just Trump on Fox. Yes, US-China tensions are now ‘a thing’ for markets to live with and ignore - like a virus I can think of. Yet there are more than enough sabres being rattled for a worrying rise in the risk of someone accidentally cutting themselves, or someone else. Prudence would suggest a cautious approach. In the real world I keep hearing that “just in time” has now switched to “just in case” for businesses. Well here’s a case it’s worth being well ahead of time on, should things go wrong.

Meanwhile, Chinese data out today show that we better all have a “just in case” plan ready. Industrial output was up 3.9% y/y in April vs. 1.5% expected, while y/y YTD terms it was -4.9% y/y; retail sales were -7.5% y/y, worse than expected, and -16.2% y/y YTD, only a slight pick-up from March’s -19.0%; fixed asset investment was -10.3% y/y YTD; and property investment was -3.3% y/y YTD, slightly better than expected. In other words, no major post-virus bounce. Against this backdrop the rise in official unemployment from 5.9% to 6.0% is doing the same Panglossian Potemkin job that GDP data used to before it became necessary to show some reality for the sake of credibility. (Or that the NBS statisticians involved learned their trade from the ABS jobs data team down in Australia).

After all, the US just saw another 3m weekly rise in initial claims vs. 2.5m expected (which are being breezily dismissed by the equity market, as usual) as they head towards 25% unemployment, at least in the short term. Which in an election year makes the need for some political distraction all the more pressing, as we keep saying, and as naive markets keep not understanding. (Although, yes, “Obamagate” is also there too.)

Mexico cut rates another 50bp, as expected, to take them to 4.50%, or what was quite recently a target for where Fed Funds would sit in the eyes of some people who don’t understand how the world has changed. Emerging markets keep cutting, or even doing QE or outright monetization, and the clock is ticking to when the next financial eruption will be.

BRL, for example, is now trading at 5.81 but having been at 5.96 yesterday. Moreover, Reuters reports that “Turkey's government has appealed to foreign allies in an urgent search for funding, three senior Turkish officials said, as it prepares defences against what analysts fear could be a second currency crisis in as many years. Treasury and central bank officials have held bilateral talks in recent days with counterparts from Japan and the United Kingdom on setting up currency swap lines, and with Qatar and China on expanding existing facilities, the officials said.” So who is going to step up to the plate this time? Qatar and China - again? Reuters quotes one official that "Talks are in a better position especially with Qatar, China and Britain…I am optimistic that a certain amount of resources will be provided". The larger question is who steps up to the plate for Qatar, especially if oil prices fall again, or for China if geopolitical tensions keep escalating?

Or for Britain, where Brexit talks are making no headway at all and we are apparently weeks away from the date at which it’s going to once again become sharply binary rather than Euro-fudge. The Telegraph reports that the EU has just rejected the UK being able to test or certify cars, chemicals, or pharmaceuticals for export to it, which in the current global trade climate will not be received well. As out ‘Brexit Boy’ Stefan Koopman points out, economic logic says that the UK and the EU strike a deal or extend the withdrawal agreement; but, as with China and the US, this is not just about economics. Prime Minister Boris also needs a good distraction from his handling of the virus, and from suggestions taxes are to rise and spending to be frozen ahead, as well as to put Brexit firmly behind him so it does not define his premiership; so given the UK is already in for its worst recession since 1709 --really!-- would it even notice the extra blow from Hard Brexit? One can make a case both ways.