I was away the latter half of last week with family, but was closely following what was a doozy for a few days.
As we discussed here in my daily notes back in April, the trade war is all about China.
Trump's "escalate to de-escalate" strategy is about drawing the rest of the world back into alignment with the U.S., using the U.S. consumer as leverage.
And then isolating China.
With that, despite a lot of talk about tough negotiations and "framework agreements" between the U.S. and Chinese trade delegations of the past six months, the dust seems to be settling on a new phase: overt confrontation, and isolating China.
Remember, in late January, a Chinese "hedge fund" revealed its DeepSeek model which had all of the ingredients to disrupt the American financial markets and the economy, just as Trump was entering office with plans to impose tariffs and other demands on the Chinese.
And late last week, as a Trump-led peace deal was just brokered in the Middle East, the Chinese government circulated a letter to trading partners threatening to choke off rare earth exports to the rest of the world.
Trump responded with, not just threats to ramp tariffs to 130%, but with language that suggested talks are off, and decoupling.
The Nasdaq fell almost five percent peak-to-trough on Friday. Bonds and gold (safe haven assets) ripped higher.
With markets looking very fragile to open the week, the administration stepped in to shore up sentiment. Trump softened his tone on China through a social media post on Sunday. And then his Treasury Secretary, Scott Bessent, was on TV this morning before the market open, to calm the waters.
While Bessent said he thought the Trump/Xi meeting would still happen later this month, he also clearly took a considerably more aggressive posture on China.
He said their threat to restrict key exports was "provocative" and a move that pitted "China versus the rest of the world."
And he said, the Trump team has "already been in touch with the allies (Europeans, Indians, democracies in Asia)," which he described as "substantial support."
That sounds like isolate China talk.
And importantly, he said they have more aggressive levers to pull than just tariffs.
On that note, as we discussed last week, the doubling in gold prices over the past 18 months closely tracks two events: the West’s seizure of Russian assets and the ongoing debate over confiscation.
Keep in mind, China still holds about $730 billion in U.S. Treasuries.
Let's take a look at the S&P chart …
This is the nearly 4% plunge on the S&P on Friday, triggered by Trump's post. It bounced today right into a key technical retracement level (the 61.8% Fibonacci retracement).
The chart looks similar in the Nasdaq.
If this retracement level holds tomorrow, we could be looking at the start of a correction, the length of which would likely be determined by the developments in the U.S./China relations over the coming weeks.
The 200-day moving average in the S&P futures comes in right at 10% lower.
We had a 10% correction July to October of 2023, which led to the Fed signaling the end of the tightening cycle. We had a 10% correction from July to August of 2024, which led to the beginning of the Fed easing cycle (in September).
If stocks correct here, it's safe to say the stubborn hand of the Fed will finally be forced to relent on overly tight monetary policy (typical reactionary policy by the Fed).
