Thread by @Trinhnomics

Good morning 🌞 - Happy Monday. We start this wk w/ Pres Trump’s threat of escalating from 10% to 25% by Friday & likely b/c of sobering news from Lighthizer😮

Will China cave? It has called Trump’s bluff before but this time Trump has the strong eco (& Fed holding) behind him🤔

We have to ask, is it Hanoi w/ North Korea where Trump walked away after accepting reality that China won’t accept NK normalise relations w/ the US w/ a chance that the US can be at its northern borders. Meaning, the meeting was set up to fail.

Hanoi unlikely so why the threat?

a) Trade-war issue is the key bipartisan support & Democrats even want tougher actions on China

b) Since Trump has gone soft on China, he was criticised & so looking into 2020 want to come out strong on China

c) Meaning, he wants to come across trying his best.

So, what’s next

Headline from the @WSJ :

China considers canceling trade talks w/ US this week 😬🇨🇳🇺🇸

@WSJ The CNH doesn't like this news & down 1% - China opens at 930am after the holidays & you bet it won't like this news either 😬

@WSJ Trump's approval ratings went up after the Mueller report to 45% from 39% so big increase & mostly coming from Democrats & independents as Republicans' approval remain sticky throughout.

So w/ NFP strong & JPO holding & approvals up, Trump feels confident to raise the stakes.

@WSJ Notice that w/ the 10% to 25% on Friday, it is mostly on intermediates & only some consumer goods & so Trump looks at strong wage & job growth & consumer confidence & w/ interest rates remaining low (Fed holding) then feels that he can up the ante so to speak...

Is it credible?

@WSJ Recap of tariffs so far: mostly on Chinese manufactured goods coming to the US (tariffs are on imports so it raises import costs from China). Btw, China exports 1/5 manufactured goods globally by value & most of its exports are manu. And this is why the employment PMI contracts👇🏻

@WSJ CNH -1.2%; SPX futures -1.9%; China likely to open RED; And Chinese dollar bond spread JUMPS on the news

(Yes, if China actually walks away, the tool that it will have to use is the CNY & if that goes, u bet that firms that borrow in USD but earns in CNY will have a hard time😬

@WSJ The BPOC cut the reserve ratio for smaller banks on 15 May & @SenSchumer just did this 👇🏻👇🏻👇🏻 so BIPARTISAN support for Trump on this 😬

https://twitter.com/SenSchumer/status/1125143336837206016?s=20

@WSJ @SenSchumer If China walks away from this & tariffs go up to 25% on Friday, have to ask, what levers can it pull to limit the downside of tariffs (it just cut the the RRR for smaller banks). China external debt 👇🏻(1.97trn USD) to think about firms w/ original sins (debt in USD but rev CNY)😬

@WSJ @SenSchumer The RRR cut for medium & small banks have less than CNY10bn of assets or 1.5bn USD will be lowered to 8% from 11.5% on 15 May (so big drop here).

Both China & the US are upping the ante & if China walks, the firms that borrowed in USD'll feel the pain 😬
Asia red👇🏻(Japan closed

@WSJ @SenSchumer 3 scenarios to consider:

a) Trump is not serious about tariffs so kicking can

b) Trump is serious about tariffs & China isn't about walking away (so deal coming)

c) Trump is serious about tariffs & China is about to walk away.

Which do you think is most likely? 🧐🤔🤔

@WSJ @SenSchumer My take is both B & C more likely than A. As in Trump would not specifically call for a hike to 25% on Friday so he was willing to do it after considering US econ, Fed holding, & BIPARTISAN SUPPORT.

So it's China's CHOICE that matters for markets as Trump shows his cards 😬

@WSJ @SenSchumer So then to arrive at whether B or C is more likely, as in China's choice, we then have to ask, if China chose B, what consequence? If China chose C what consequence & what can it do once it chose C.

I have a few ideas...

@WSJ @SenSchumer China total external debt is USD2trn but 1.3 of that is SHORT-TERM 😬 or 63% of its external debt is short-term 😬😬😬& this is why China dollar debt spread is widening today as MOST external debt is short-term...

@WSJ @SenSchumer Notice that the RRR targeted cut to 8% for small banks (asset less than CNY10bn) is pretty small & expected to inject only 280bn CNY or USD41bn USD which is basically a drop in the bucket...

@WSJ @SenSchumer SHCOMP -5.3% & ChiNEXT Composite -6.33% HSI -3.7%

Yes, this is just an intra-day move 😬😬😬as markets fret option C.

@WSJ @SenSchumer China down >5% only 24 times since Jan 2010 & most were in 2015 & 2016 & 1 time in 2018 & now 1 time in 2019.

It is among the most volatile equity indices in the world so plenty of up & down but mostly down... 😬

@WSJ @SenSchumer Guys, don't worry, the stop loss for Chinese stocks is -10% & so losses will be limited 😬😬

@WSJ @SenSchumer Looks like teh @scmp reporting that Liu is going to the US but defo a shorter trip so somewhere b/n B & C & I'm sure that drop of Chinese equities is defo giving a nudge? 🤔🇨🇳🇺🇸🤗

reuters.com/article/us-usa…

@WSJ @SenSchumer @ScMp Roughly 500 stocks are suspended in China already as it reached the -10% stop-loss level 😬😬😬

@WSJ @SenSchumer @ScMp Let's take a break from equities & look at bonds -> huge outflows in April given "strong" retail sales & IP & also higher inflation & fear of the pig 🐷🐽🐖inflation in H2 2019 😬👇🏻

@WSJ @SenSchumer @ScMp China spokesperson:

China position clear-cut, US knows it well;
China hopes to meet halfway w/ US, reach win-win deal
Declines comment on trade talks timing & Liu He going to the US
Chinese team preparing to travel to the US for talks
Opposes US actions in South China Sea & 5G