With 'Not QE' inflating risk assets and President Trump promoting a non-existent trade deal, something we outlined last week, new evidence is being communicated by various Chinese sources in the previous 24 hours that suggests a deal is unlikely in the coming weeks, and it now might be time for investors to readjust risk-taking behavior.
On Monday morning, CNBC's Eunice Yoon tweeted, "Mood in Beijing about #trade deal is pessimistic, government source tells me. #China troubled after Trump said no tariff rollback. (China thought both had agreed in principle.) Strategy now to talk but wait due to impeachment, US election. Also prioritize China economic support."
Then on Tuesday morning, Global Times Editor In Chief tweeted, "If President Trump believes China's economy is crumbling and Beijing will eventually make decisive concessions, he has to wait until Ivanka becomes the president to sign trade deal with China."
The message being broadcasted from China is the polar opposite from President Trump, who recently tweeted, "The deal I just made with China is, by far, the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country. In fact, there is a question as to whether or not this much product can be produced? Our farmers will figure it out. Thank you, China!"
The deal I just made with China is, by far, the greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country. In fact, there is a question as to whether or not this much product can be produced? Our farmers will figure it out. Thank you China!— Donald J. Trump (@realDonaldTrump) October 12, 2019
It appears there's still a significant gap in US-China trade talks, though Western media, influenced by the White House, has already taken a victory lap of President Trump's "greatest and biggest deal ever made for our Great Patriot Farmers in the history of our Country."
So this distortion of reality via Trump admin propaganda has been used to pump the stock market to record highs and lift animal spirits of consumers ahead of a possible recession.
Even if there's a 'phase 1 trade deal', it'll likely to disappoint investors because President Trump publicly overpromised on many fronts. He said in October that the deal would cover 60% of the "total trade deal," but that amount remains uncertain.
So investors could be staring at a disappointment phase, one where President Trump, again, like every other time, overpromised and underdelivered for the sole purpose of pumping stocks.
Fathom's China Exposure Index (CEI), which monitors the relative stock market performance of US-listed firms with significant revenue exposure to China, has been seen as a lead ahead of a stock market sell-off triggered by trade pessimism.
As shown in the chart below, lower CEI is due to investors selling US firms that do the most business in China, and CEI moves higher as trade optimism appears.
And with that being said, the CEI has likely peaked in November as trade talks stall. If the CEI starts to move lower, this means investors are de-risking US companies with high exposure to China first, which implies sentiment in the broader stock market averages will likely peak next.