Rabobank: “Quite A Market Disconnect Has Formed: We May Be Just Weeks Away From The Levee Breaking”

Submitted by Michael Every of Rabobank

Arrogant And Offensive

“Arrogant and offensive”. Not today’s Daily. Well not deliberately and/or any more than usual.

Rather those three words, followed by “Can you imagine having to work with these truth twisters?” were tweeted out by the British civil service on its official account yesterday before being deleted.

This was in reference to the UK government lining up to bend over backwards to support PM Johnson’s advisor Dominic Cummings, who stands accused of having broken the virus lockdown rules that he helped draw up. Listen to UK radio and read the press: the sense of public anger is palpable when just weeks ago people were genuinely concerned for BoJo’s health. The lockdown was already fraying: now it may be undermined by a perceived “one rule for them and another for us”. Which we have a whole lot of globally on many fronts.

What an era we are living in when a tweet like that can go out in he UK: and yet I must confess I wasn’t sure exactly which government this was referring to when a screenshot of it was first shared with me.

“Arrogant and offensive” and “truth twisters” is certainly what the US and China are loudly claiming of each other. The White House recently released a 16-page strategy document laying out how it plans to push back against Chinese practices it sees as undermining it, albeit prefacing that “Competition need not lead to confrontation or conflict….We do not seek to contain China’s development, nor do we wish to disengage from the Chinese.”). More bluntly, US Secretary of State Pompeo is touring the world directly attacking the Chinese Communist Party. Moreover, Reuters reports if Beijing introduces a national security law in Hong Kong the US will stop recognizing its separate legal status, and economic sanctions will be introduced (as the UK Daily Express reports “Britain Ready to Welcome Hong Kong Refugees” – is this BoJo distraction or principle?).

On the other hand the Chinese Ministry for Foreign Affairs yesterday issued a huge number of tweets, including: “One has to have a sense of right and wrong. Without it, a person cannot be trusted, and a country cannot hold its own in the family of nations”; and “We Chinese value peace, harmony, sincerity and integrity. We never pick a fight or bully others, but we have principles.“ That as the Foreign Minster publicly warned the US should give up “wishful thinking” that it can change China, and that its actions (to counter China, in US eyes) were pushing the two countries towards a new Cold War that is “dangerous and will endanger global peace.” (Regular readers will recall we have been saying this is the reality for years.)

In short, both sides are saying they are the victims and the good guys: in fact Xi Jinping yesterday referred to China as “the broadest, most genuine, and most effective democracy to safeguard the fundamental interests of the people.”

Such a backdrop can indeed endanger global peace if we are not careful. More obviously it endangers the view that markets always trump politics – or rather trump Trump’s politics. Yet markets still don’t fully get this. Yes, HKD 12M forward points exploded higher on Friday and Hong Kong stocks were -5.6% at the close. But forwards were flat today and the Hang Seng was only down a further 1% at time of writing despite the clear warning of what is about to happen from the US, which was only guessed on Friday.

Why? Perhaps as within serious HK money circles there is absolute certainty that the US is now an EU-style paper tiger and has no stomach for a real fight, and that Trump is so beholden to Wall Street that he won’t dare act. I would wager that while this captures the self-confidence in Beijing it utterly fails to capture the bipartisan anger in DC, or the fact that both sides are using Beijing as a stick to beat each other with in the 2020 presidential election, or that the US has financial weapons as fearsome as its military. Or that the Fed is there to prop up the stock market anyway.

Let’s see how USD/CNY and USD/CNH continue to unfold ahead. Today saw CNY fixing set at 7.1209, the lowest since 2008, yet there has not been any follow-through selling in either CNY or CNH on the back of New Cold War calls, or the threat of looming sanctions on Hong Kong.

Quite the market–politics disconnect…for now at least. But we may be just days or weeks away from the levee breaking, with Hong Kong the most likely trigger. However India-China, where the PLA are reportedly 2-3km inside Indian territory and setting up camp, is also another flashpoint to watch.

Meanwhile “arrogant and offensive” is also what the different sides in Europe appear to think of each other: the East vs the West on liberalism vs. illiberalism, and north vs. south on stimulus v. surplus; and with a whole lot of truth twisters on all sides of all those arguments. Will we see any further breakthrough on that front this week? Markets will move accordingly.