Written by Lance Roberts, Clarity Financial

As noted previously, on Friday, the Trump administration is putting a “review on investment limits” for China. This would potentially include:

• Delisting Chinese companies from U.S. stock exchanges, and;

• Limiting Americans’ exposure to the Chinese market through government pension funds.

Please share this article – Go to very top of page, right hand side, for social media buttons.

This is a direct hit at China which has made huge strides in economic ambitions and technological advances on the back of American financing. This chart below, courtesy of Zerohedge, shows the market capitalization of Chinese companies trading on U.S. exchanges:

As noted above, this is all “talk” by the administration. While Trump has green lighted the discussion, there is reportedly no timeline for any action which suggests this is nothing more than “posturing” ahead of trade talks. While the markets didn’t like the news on Friday, this plays well into the strategy we believe Trump is setting up for the mid-October meeting with China to “negotiate a trade deal.”

This additional “threat” is being brought to the bargaining table in October, and is one Trump can easily back off of in exchange for greater market access for American companies in China. (This is something Trump has previously asked for, and China has already agreed to provide.)

However, while the Democrats are busy trying to impeach President Trump over the latest White House scandal, Trump has continued to try and keep the markets happy by promising a “trade deal is coming,” just as he told the White House press pool on Wednesday:

“They want to make a deal very badly… It could happen sooner than you think.” – Reuters

I remain unconvinced as China responded immediately afterward.

“China’s top diplomat hit back at U.S. criticism of its trade and development model in a speech on Tuesday after Trump spoke at the United Nations. Wang Yi, China’s foreign minister and state councilor, said Beijing would not bow to threats, including on trade, though he said he hoped the high-level trade talks next month would produce positive results.” – Reuters

If this all sounds rather familiar, it should, because it is the same thing they said a month ago.

“Beijing’s latest ‘gesture’ has increased the prospects for a narrow trade deal with the US. But it’s a small deal. It means that there would be no escalation of tariffs as China has agreed to make more purchases. It could provide a certain level of comfort to US farmers and give Trump something to brag about.” – Hua Changchun, economist at Guotai Junan Securities, PRC

China is indeed making “small concessions” for things they need as a country. As we noted two weeks ago:

“China, smartly, is using the opportunity to buy soy and pork products (which they desperately need due to a virus which wiped out 30% of their pig population) to restock before the next meeting.

This is a not so insignificant point.

China is out for “China’s” best interest and will not acquiesce to any deal which derails their long-term plans. In the short-term, they may “play the game” to get what they need as a country, but in the long-run, they will protect their own interests.”

However, don’t mistake China’s move as “caving” into Trump. Such is hardly the case.

While Beijing will allow Chinese businesses to purchase a “certain amount of farm products such as soybeans and pork” from the US, China has also cut a deal for soy meal from Argentina.

“China will allow the import of soymeal livestock feed from Argentina for the first time under a deal announced by Buenos Aires on Tuesday, an agreement that will link the world’s top exporter of the feed with the top global consumer.” – Reuters

The pressure is on the Trump Administration to conclude a “deal,” not China. Trump needs a deal done before the 2020 election cycle; AND he needs the markets and economy to be strong. If the markets and economy weaken because of tariffs, which are a tax on domestic consumers and corporate profits, as they did in 2018, the risk of electoral losses rise.

Trump Looking For A Fast Exit

This is an important point.

China knows that Trump needs a way out of the “trade war” he started, but that he needs a something that he can “boast” as a victory to a largely economically ignorant voter base. Here is how a “trade deal” could get done.

Understanding that China has already agreed to 80% of demands for a trade deal, such as buying U.S. goods, opening markets to U.S. investors, and making policy improvements in certain areas, Trump could conclude that “deal” at the October meeting.

It is only the final portion of Washington’s demands which have stalled negotiations so far:

• Cutting the share of the state in the overall economy from 38% to 20%,
• Implementing an enforcement check mechanism; and,
• Technology transfer protections

These are the “big ticket” items that were the bulk of the reason Trump launched the “trade war” to begin with. Unfortunately, for China, these items are seen as an infringement on its sovereignty, and requires a complete abandonment the “Made in China 2025″ industrial policy program.

However, Trump can set aside the last 20%, drop tariffs, and keep market access open, in exchange for China signing off on the 80% of the deal they already agreed to.

Which is precisely what Trump’s comments recently alluded to:

“Not surprisingly, as Trump said on Thursday, while he prefers a broad deal, he left open the possibility of a more limited deal to start.” – Reuters

That is code for: “Let’s get a deal on the easy stuff, call it a win, and go home.”

This is the strategy we suggested was most likely two weeks ago:

“For Trump, he can spin a limited deal as a ‘win’ saying ‘China is caving to his tariffs’ and that he ‘will continue working to get the rest of the deal done.’ He will then quietly move on to another fight, which is the upcoming election, and never mention China again. His base will quickly forget the ‘trade war’ ever existed.

Kind of like that ‘Denuclearization deal’ with North Korea.”

Would A “Deal” Change Anything

Assuming we are correct, and Trump does indeed “cave” into China in mid-October to get a “small deal” done, what does this mean for the market.

The most obvious impact, assuming all “tariffs” are removed, would be a psychological “pop” to the markets which, given that markets are already hovering near all-time highs, would suggest a rally into the end of the year.

This is not the first time we presented analysis for a “bull run” to 3300. To wit:

“The Bull Case For 3300

• Momentum
• Stock Buybacks
• Fed Rate Cuts
• Stoppage of QT
• Trade Deal”

As I noted then, price momentum has been in control of the markets over the last several months. Given that “an object in motion, tends to stay in motion,” momentum is a hard thing to stop without a bigger event triggering a reversal in investor attitudes.

When I wrote the article previously, the Fed had not cur rates yet. Since that writing, they have cut rates twice, increased their balance sheet, and are hinting at the return of more “QE” if needed by letting the “balance sheet grow organically.”

Thursday, I wrote in detail about the continuation of corporate share repurchases and the impact on the financial markets. Companies remain almost the sole source of net equity purchases.

“Between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their own shares, there have been effectively no other real buyers in the market.”

The only thing left is the “Trade Deal.“

A deal would alleviate some concern on corporate profitability, and as J.P. Morgan’s chief equity strategist Dubravko Lakos-Bujas previously told MarketWatch:

“If you have a trade deal, and if the trade deal coincides with one or two rate cuts from the Fed, we see an upside scenario of 3,200-3,300.”

Yep, the same number we came up with.