Investors once again showed concern about the US-China trade war. However, Wall Street does not seem to be totally frightened.
Even after the recent drop, the S&P 500 is only 6% away from its all-time high. One of the key factors that contributed to this is that investors know that President Donald Trump is focusing heavily on volatility in the stock market. There is a widespread belief that Trump will not let anything really bad happen to stocks before the next presidential election.
Wall Street is betting that if the market falls sufficiently, the White House will find a way to achieve trade peace with China rather than risk losing the 2020 elections.
” If the pain gets too great in the economy and stock market, he will have to find a face-saving solution,” said the president and co-founder of the JMP Group, a San Francisco-based investment bank.
It’s a new role in the Fed’s position, the term for a trading strategy based on the belief that the Fed will save the markets and the economy by cutting interest rates.
Trump checks the financial markets “every few hours,” according to Stephen Moore, a Trump campaign adviser.
“He understands that if the stock market and economy crash on him, there’s no way he can get re-elected,” Moore said earlier this month at the SALT conference in Las Vegas.
The financial markets have fallen in recent weeks amid fears of a trade war between the world’s two largest economies. Tense investors poured money into bonds. This led to a 10-year Treasury yield drop to its lowest level since late 2017.
Trump has threatened to impose tariffs on all remaining US imports from China. Chinese state media have put forward the possibility of harsh retaliation, including curbing imports of rare metals or even dumping Beijing’s huge holdings of US Treasuries.
Investors hope Trump and Chinese President Xi Jinping will make progress in trade negotiations at the G20 summit next month.
The total collapse of US-Chinese talks could cause US stocks to fall by between 10% and 15% from current levels. This will not bode well for Trump and the chances of his re-election and this will pressure him to complete the deal.
In the face of economic and market turmoil, Trump and Chinese President Xi reached a temporary trade truce in late 2018 in Argentina.
However, analysts cautioned against assuming that Washington and Beijing would automatically reach a face-saving deal this time. It is usually the market and economy that drive political results rather than the policy driving results.
One of the dangers is that Trump decides that fighting with China is politically popular enough to cover the economic fallout. Another potential problem is that Trump may choose a deal – only to be rejected by Beijing.
In other words, Trump may not be able to flip a key to make the trade war disappear.
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