We Now Know What The "Trump Tariff Put" Is

Submitted by Nick Colas of Datatrek Research

We got the first sign of a “Trump Tariff Put” on Monday as the White House walked back threats to the Tech sector late in the day after a steep intraday decline in US stocks. That got us wondering: what sort of equity market pullback would it take to have the White House shelve/materially soften its plans to renegotiate numerous trade pacts? Our back of the envelope math: 9% on the S&P from here, or a 3-5% one-day decline on Chinese/European retaliation.

In a recent note we cast a wary but hopeful eye on the notion of a “Trump Tariff Put”; yesterday we saw it in action. The day started with a Wall Street Journal article outlining possible limitations on Chinese investment in US companies with “Industrially significant technology”. A pre-open walk-back tweet from Treasury Secretary Mnuchin did little to calm markets. At the lows of the day the S&P was at 2700, down 2%.

Then trade advisor Peter Navarro came out in the afternoon and said to “discount” notions that there would be investment restrictions. That seemed to do the trick, and the S&P closed at 2717. One gets the feeling that perhaps policymakers are unaware that Technology is 26% of the S&P 500, and by taking its trade issues into that sphere they crossed a red line. At least as far as equity markets go…

Making some lemonade from Monday’s tart action, at least we now know what sort of market action makes trade hawks fly back to the nest for a break. The magic number seems to be 2% on the S&P and right around 500 points on the Dow Jones Industrial Average. For our readers who trade for a living, it is worth keeping those numbers in mind for future trade news-driven days.

Thinking a little more broadly about the “Trump Tariff Put”, let’s consider how much of a stock market slide it would take to convince the White House to materially soften its efforts on this front. We know from Monday’s headlines this is their Achilles Heel. But how big is that target?

A few background thoughts here:

  • #1. Whether by a happy accident or entirely intentionally, policymakers have staged their economic/trade program quite cleverly since the start of 2017. Year 1, focus on tax cuts to rev the US economy and push equities to all-time highs. Year 2, do the heavy lifting on the trade issues that were a hallmark of President Trump’s campaign for office. Hope that Year 1’s actions serve as a counterweight to Year 2’s harsher measures.
  • #2. That makes the current trade initiative entirely dependent on real-time economic growth and, by necessity, equity market returns. And since the latter keys off not just on current earnings but their perceived sustainability/future growth, the Trump administration’s focus on stock prices does have some self-correcting moderation built into the cadence of its actions.
  • #3. The wild cards in the deck just now: a Federal Reserve bent on raising interest rates, a slow motion train wreck in emerging markets, and global debt levels over 2x higher than a decade ago. How much of these factor into White House trade policy is hard to know. The same holds true, of course, for US equity prices. And how much the current administration will parse the effects of these factors to determine its course of action on trade is the $64 question.

So how much of an equity decline would it take for the administration to soften its tone on trade? Two answers:

  • Down 9% on the S&P from here, as long as the decline was clearly due to trade war concerns. The math behind this guesstimate: the index is up about 18% since President Trump took office. Giving back half those gains would be palatable. More than that would not be, and may even spook markets and consumers into thinking a recession was inevitable. Not the right scenario going into midterm elections.
  • A 3-5% one-day move lower based on European/Chinese retaliation. We know from Monday’s action that 2% is some sort of a pain threshold, but “fixing” it was still in the administration’s power (Navarro’s late date walk-back). If that were not possible because the catalyst was outside US control, that might be enough to push the White House into a softer stance.

Bottom line: as investors gather more experience with this administration, they see that it responds and shifts positions based on news flow. And if we’ve learned one thing about “Policy puts” over the decades, it is that markets get pulled in the direction of the strike price once volatility picks up.

Comments

Mikeyyy Four chan Tue, 06/26/2018 - 18:53 Permalink

Trump's already backing down.

 

 "Trump Signals He Favors Mnuchin’s Path to Shield Tech From China"

 

(Bloomberg) -- President Donald Trump signaled he may take a less confrontational path toward curbing Chinese investments
in sensitive American technologies, potentially relying on a U.S. committee that scrutinizes foreign acquisitions for
national security risks. Trump made remarks Tuesday at the White House that appeared to align with Treasury Secretary Steven Mnuchin’s approach, in an internal administration debate over how to protect U.S. intellectual property from China.

 

 

 

In reply to by Four chan

swmnguy hxc Tue, 06/26/2018 - 18:59 Permalink

Normally, the point of the "good cop / bad cop" strategy is to get something all the cops want.  Trump's not getting anything at all from this charade.  He's just backing down.  The bad cop doesn't threaten to beat up the suspect, and then the good cop takes the suspect to the front door and lets him go.

In reply to by hxc

napper Mikeyyy Tue, 06/26/2018 - 23:11 Permalink

Too late even if Trump is backing down. The current crop of Chinese leaders are not stupid; on the contrary, they have proved to be far better strategic thinkers than those lowlifes in Washington - be they neocon fanatics, religious fanatics, right-wing fanatics, Zionist / pro-Israel fanatics. (Not really a compliment yet considering the low-grade morons I'm comparing them to.)

 

Trump has lit the fire among Chinese technocrats to accelerate investment / subsidies in the high tech chip industry while preparing high tariffs / barriers against American products.

 

Worse, the date of overthrowing the Petrodollar might have been pushed forward, especially with Russia, Iran, Venezuela etc eagerly waiting for the kill.

 

China is a big creditor to the already insolvent US and at the same time holding a huge trade surplus. The vast majority of the economically and financially illiterate Trump (& Hillary Clinton) bonehead supporters don't know what it means -- it means China is currently shipping a lot of its products to the US for FREE!!!

 

Why would you want to stop getting stuff for free by engaging your big creditor and trade partner in a trade war????? Playing politics for the heck of it???

 

Peter Navarro is an academic impostor, a shameless liar, an incompetent policy maker, and a wannabe star politician -- like Trump. John Bolton? A totally worthless piece of human garbage and aspiring war criminal. Throw in the flagship bullshitting megalomaniac Donald Trump and a corrupt, incompetent Congress, any wonder why the US is fermenting in an economic and financial shithole?

In reply to by Mikeyyy

DingleBarryObummer Tue, 06/26/2018 - 18:14 Permalink

On July 6th (if Trump doesn't cave on the trade war with China) the market will have the biggest one day drop in years.  Can't make an omelette without breaking some eggs.  It's time to sack up and pop this despicable bubble.

gatorengineer DingleBarryObummer Tue, 06/26/2018 - 18:43 Permalink

So you are saying you think a Cave is Priced in?  Its hard to say with the magnitude of the actions of the PPT.... The stocks that are going get hit the worst are ^Rut stocks and they kicked ass today, for no real reason.

My personal guess is that if he does cave its going to put in a 4% up, I guess I am saying the PPT has been carrying, not retail....  I think I want to be flat as of July 3, and either sell the rip on the 6th, or buy the dip...

In reply to by DingleBarryObummer

1982xls Tue, 06/26/2018 - 18:20 Permalink

Bullshit. Tariffs are bullish. They are like the cover charge at the Titty Bar. You want in? Fucking Pay me.

He who has the highest tariffs wins.

Trump asked them to lower all of theirs to zero. They said no.

They all want to be highest.

east of eden Tue, 06/26/2018 - 18:24 Permalink

It is both pathetic, and hilarious, to watch you destroy yourselves, over a loaf of bread and a bottle of wine.

You. The 'great' Americans. The 'exceptional' ones.

And so it turns out that all you are left with is a handful of crazed southern rednecks who would do anything, say anything, for a bottle of whiskey. 

 

Alexander De Large Tue, 06/26/2018 - 18:53 Permalink

Our governments are run by AI in the form of stawk algos.  This was made abundantly clear today, for Trump's base of Sling Blade cast members who weren't getting it before.

Everyone wondering about Skynet, HFT algos ARE Skynet, you dumb little bastards.

They tell everyone precisely how to behave, from your classic drunken crackhead sex offender nigger shitting himself in an alley, to your quintessential closeted gay Jeff Foxworthy on crystal meth Trump voter in an American flag t-shirt.