When is a trade deal “over”?
That was the key question during an extraordinary few hours in which a key adviser to US President Donald Trump managed to sow confusion on Wall Street in a way seldom seen.
The saga began on Monday evening when Peter Navarro, Mr Trump’s chief trade adviser, gave an interview to Fox News.
During the interview, Mr Navarro criticised China’s government for its handling of COVID-19, prompting Martha MacCallum, the anchor, to ask whether the trade deal that China and the US have been negotiating was over.
He replied: “It’s over. Yes. I think that – here is, I think, the turning point. They [the Chinese trade negotiators] came here on 15 January to sign that trade deal. And that was a full two months after they knew the virus was out and about. It was at a time when they had already sent hundreds of thousands of people to this country to spread that virus.
“And it was just minutes after wheels up, when that plane took off, that we began to hear about this pandemic.
“And I think everybody here inside their perimeter and around this country now understands that China lied, Americans died.”
His comments immediately sent US stock futures prices sharply lower – US equity markets had closed for the day – with the Dow Jones future pointing to a fall of 400 points. The yield on US Treasuries fell as investors reached for a traditional safe haven. Elsewhere, the Chinese yuan wobbled against the US dollar, while stocks in Shanghai were also sent lower. Other assets whose prices fell included copper and crude oil – two key barometers of economic activity.
The shocked reaction of investors immediately sparked what Dow Jones Newswires described as a “scramble” in the White House.
Senior Trump administration officials, including Larry Kudlow, director of the president’s National Economic Council, were quickly wheeled out to tell reporters that the agreement had not been scrapped.
Mr Navarro issued a statement to the media in which he said: “My comments have been taken wildly out of context.
“They had nothing at all to do with the phase one trade deal, which remains in place. I was simply speaking to the lack of trust we now have of the Chinese Communist Party after they lied about the origins of the China virus and foisted a pandemic upon the world.”
Meanwhile, Mr Trump reached for his favourite communications medium, tweeting: “The China trade deal is fully intact. Hopefully they will continue to live up to the terms of the agreement!”
His message poured oil on troubled waters and, as the Asian trading session went on, equity markets recovered. Most Asian stock indices closed higher with the Hang Seng in Hong Kong swinging in one of the biggest ranges in its history.
The episode nonetheless has not helped the Trump administration’s reputation among investors.
Peter Cardillo, chief market economist at broker and wealth manager Spartan Capital, told clients in his daily note: “It appears this administration is ever so confused as the president says one thing and [his] trade adviser says another.
“These types of uncertainties could lead to another round of unsettled markets in spite of the Fed’s printing presses working at full speed.”
And Kenny Tang Sing-hing, chief executive of the fund manager China Hong Kong Capital Asset Management, told the South China Morning Post: “US-China trade tensions will continue to roil the markets this year…there will continue to be some noise.”
While the US-China trade deal lives on, though, the episode is also a pointer to the volatility that can be expected ahead of this autumn’s US presidential election.
Lee Harman, currency analyst at the Japanese bank MUFG, said: “Last night’s price action does highlight that the foreign exchange market remains sensitive to trade policy uncertainty. It remains a potential trigger for higher volatility.”
Moreover, the two are deeply interconnected, with many political economists believing that Mr Trump needs a trade deal with the Chinese to help him secure victory in November – a view given more credence by the recent revelations from John Bolton, Mr Trump’s former national security adviser, that the president sought help from Xi Jinping, China’s president, to win re-election.
So, as the election draws closer, investors will be watching closely for signs that a deal is more or less likely. And mixed messaging from the administration is likely to trigger more upheaval.