Stocks, Yuan Tumble On Reports That 'Phase One' Trade-Deal Delayed

A Saturday call between Mnuchin, Lighthizer and China’s Vice Premier Liu He was described as “constructive” by Chinese state media Xinhua, but that all changed this week.

This should come as a surprise to absolutely no one (especially after last night's vote on the Democracy Bill), but Reuters is reporting that 'Phase One' US/China trade deal may not be completed this year, citing trade experts and people close to the White House.

Additionally, Reuters reports that Trump and US Trade Representative Robert Lighthizer recognize that rolling back tariffs for a deal that fails to address core intellectual property and technology transfer issues will not be seen as a good deal for the U.S., a person briefed on the matter said.

To be sure, it's not just the Senate vote that may have scuttled any hope of a deal: China's insistence for tariff rollbacks isn't helping. As Brad Setser notes,

The "bigger" the deal, the harder it is to get an "inked" agreement.

The easy deal remains that the US continues to defer the October tariff hike and postpones the December hike and China continues to buy some pork and soybeans.

The more China presses for tariff rollback, the more the U.S. wants in exchange and the more the U.S. presses for a durable commitment by China to raise its agricultural imports toward $50b, the more China wants in exchange.

Risk to the market of course is that those seeking a bigger deal don't take the easy deal (which doesn't require either side to make any real concessions) and end up escalating.  

That's precisely what is taking place now, as US equity markets are tumbling amid fears of abrupt - or shocking, as we warned yesterday - escalation:

As the odds of a trade deal are plunging

Source: Bloomberg

And Yuan is back at its weakest since October...

Source: Bloomberg

Additionally, as Rabobank noted yesterday, if Trump gets wind of the fact that China is ignoring him, or even has the perception Beijing is working against him politically, it must surely raise the risk of higher US tariffs - at least on 15 December - rather than the risk-on imminent decrease so many have said so loudly for oh-so long.

This is not aging well...

Of course, we know what happens next...

And sure enough the market is starting to price in a more dovish Fed...

Source: Bloomberg