China Saber-Rattling Likely, As Trade Tensions Escalate

material escalation at that between the US and China. The question is how far will this go, what will be the retaliation by the United States, and what is China's goal? Here? Is the goal just not to even try to have a trade deal with the US? Joining US now? Matt Gerkin, geopolitical strategist for b c A Research in Montreal, joining

US by phone. Matt, let's start there. Do you think that China's allowance permitting the U n to go above seven per dollar was a clear retaliatory sure to the United States saying we don't care anymore about preserving this level because you guys clearly don't want to make a deal with US. Hi. Yes, thanks to glad to be on.

It's absolutely a retaliation. The six point nine level was the level at which Trump was inaugurated, and seven, of course is a psychological level as well for the markets, and it's been known within politics political circles as well. So they're clearly saying, look, you've gone to all Chinese exports to the US. Now we're going to retaliate in the easiest, clearest way for US. And of course it's also a way of stimulating their economy, which is hitting

getting hit from this move. So, Matt, let's step back a little bit. What do you think the long game is for China? Because I'm sure that I think for a lot of investors that they just don't have a good handle on that. The long game for China is to first of all, try to divide the United States from the rest of the West UH, particularly Europe, which

is the swing play are in this entire geopolitical conflict. UH. It is to continue to weaken the US by continuing the global status quo, which is one in which China is able to continue state oriented, mercantilist policies of its own while the US suffers from political division Internally and is in populism, etcetera, and is not able to focus a constant trated Western coalition against China and the US. How could the US potentially retaliate here? And what's the

goal there? I think from the US point of view, there's there's two goals. Trump is very short term. Trump is of course thinking about the election. But what he's learned is that the market has climbed the wall of worry repeatedly on the tariffs, and the U s economy is held up pretty well, and that gives him room to pursue the trade war with China, where Americans are fairly skeptical. I mean, Americans do think China treats on cheats on trade, and Americans don't have a very favorable

of China. But meanwhile, he's got to try to tamp down other crises, whether they be domestic or you know, trade conflicts with other countries. He'll try to wrap those up in order to keep the impact on markets somewhat controlled on his short term timeframe. Long term, of course, the US is worried about technological supremacy. So Matt the

unilateral style of negotiating trade negotiation of President Trump. Here are you suggesting that as it relates to the US and China, that that's not the way to go, that it needs to be more of a bilateral kind of

a more of a global type of negotiation. Well, I don't have an opinion on it, but as an analyst, I think it's it's pretty clear that the US would have greater influence over China if we had a unified coalition of the willing, where basically about nine percent of China's GDP would be exposed to potential trade impacts as opposed to today, which is, you know, about five percent

or less. Because essentially the U s would be able to get Europe in Japan on the same page UH and then prosecute the trade practices and and the cyber practices that it's most concerned about, and China at that point would be forced to capitulate because the entirety of its export profile would be threatened. UM. That's not the course Trump has taken, and one of the reasons is because it takes a long time for the diplomacy with

Europe and Japan. UH. Instead, he's chosen to lead from the front and to aggressively UH prosecute the trade issues with China, and this has been a paradigm shift, but I think it was one that was long and coming. So just give you a sense of the market reaction as backed down nearly three two point nine percent decline, SMP down two point three percent. Clearly markets are taking this as a negative sign when it comes to global growth.

But just to take a bigger historical perspective, as you're so good at doing matt, you know, what is the chance that this tip for tat becomes something more and escalates into something that's potentially even uh military high chance. I mean, I think actually we'll see saber rattling in the immediate term. And the reason for that is that the breakdown in US China relations has been taking place

since the financial crisis. We have clearly moved beyond the period from nine to two thousand and eight where we had this huge day tent between US and China, which was driven by the Cold War and China's industrialization. Now China is a near peer competitor to the United States, and as I mentioned, technologically, China is gaining on the US and threatening the US over the long run, which

is the ultimate determiner of the power of nations. So the U S is strategically rotating to Asia Pacific, regardless of the administration or political party. And and China, of course is feeling the heat. They're feeling contained, and they've got a slowing economy now on a again on a secular level. Uh, and that's going to cause them to indulge in nationalism and uh. And these two things combined mean that these two countries will continue to see sanctions, caraffs.

It's a persistent threat and saber rattling in the near seas of China. So, Matt, I think one of the issues that President Trump has introduced recently as the talks seem to have kind of broken down between US and China, is that maybe any type of meaningful negotiation will be pushed beyond the presidential election. Is that a reasonable view? And your in your thought, we have actually consistently argued that China's best play is to wait until after the election.

It it just doesn't do them good to commit to publicly to irreversible structural reforms that could heighten domestic economic risks for China before even knowing the outcome of the US presidential election. So I think they're playing the long game, as is well known about China, but even specifically, Trump is playing a very short game and they're taking advantage of that. And it's one reason why the Trump administration

has has become angry. But also, of course Trump has ammunition because, as I mentioned, the market, you know, it climbs the wall of worry with the tariffs thus far, and that gave him the ammunition to decide to go all the way. Now he has to try to do damage control and make sure he doesn't create a bear market which could lead to a recession and get him kicked out of office. Matt Gerkin, thank you so much

for joining us. Matt's a geopolitical strategists at bc A research based on Montreal, Quebec, giving us some very valuable perspective on kind of the U. S. China negotiations, not just hear what we're seeing right now, but kind a little bit of a historical perspective and uh, just highlighting the risk to the market today and maybe even bigger

risk going forward. Well. Trade negotiations are without question facing new obstacles as President Trump increases tariffs once again and the Chinese just allowing that you want to weaken below the seven to one level to get a sense of what that means for currencies going forward. We welcome Dr Win Thin. He's a global head of currency strategy at Brown Brothers Harriman in New York City joining us on the phone. So Dr Thin, thanks so much for joining us.

Does it appear to you that the Chinese are weaponizing the one? Uh? You know, the break of the seven levels has always uh capture one attention. But I would just say that there's nothing magical about this level. Uh. The Chinese stories have come out in the past, and they have come out today and saying they will not weaponize the yawn, and I take them at the word they We saw the disaster that the two thousand and fifteen evaluation brought onto Chinese markets, so I think they

will shy away from that. The one thing I would point out, and I read a nice correlation study using your function on your Bloomberg the correlation between c N y on shore you on and m S c I E m f X has a basket of e MC currencies. It's running my point eight two very very high correlation. So what that's it's basically the Chine of the ways are allowing you want to sort of reflect greater market forces trading with the rest of EM rather than being

somewhat pegged. So okay, if you have the mixing paste it down half one and half percent, two percent, you know, the rest of em getting clovered. It's not it shouldn't be surprised that the U want is trading along with it. Certainly that's the case. However, I do have to push back a little bit because this the value or the weakening of the U N it is was not a gradual issue. This was the decline was the most since

two thousand and fifteen for any single day. It was a huge plunge, and it was a shift in the pboc's rhetorics. So how do you sort of interpret that. Well, I have to say, look at the rest of EM. It's not like it's not happening. The vacuum, the emson selling off since Wednesday when the Fed delivered a lesstubblished than than expected cut. So you know, again, e M has been under incredible pressures, not just you want look

at EM equities. It's pretty much the MSc i UH e M has pretty much given up over three quarters of this year's rally and getting back towards the January lows. So you know, again there's a lot of moving parts. I have sympathy what you're saying, but I really I guess I'm trying to be a sort of note of caution saying, Look, the Chinese responding in other ways. They've for instance, there's reports that they've told the state importers

to stop buying US agricultural goods. Uh. And we know that this trade truce was really not laughing very long, So uh, what's happening? I think what the authorities are trying to do in China is they're separating the effects from the trade. I really do believe that that. Um, they don't want to let the genie out of bottle. We we saw what happened back into downs between massive capital outflows out of China, very destabilizing, UM when they devalued.

I don't think they want to go down that road again. So dr then, is there any sense of where the Uuan could go? Here? I mean, we're in very uncharted territory. It's been a you know a long time since we've seen this thing get off the seven peg. Any sense of where this could go? Sure? Uh? And I again, I'm gonna go take it from my lens of sort of the wider um e M. I'm very negative on

him as long as he's trade pensions continue. Um. You know, EM is very very vulnerable, not not only the commodities but also the Asian exporters in the China supply chain. So I'm very very negative EM. And because I'm negative on EM effects given that point eight to correlation, I'm also very negative on on nuance. So I think it'll have a seven handle and we'll go up towards seven and a half. Um. Again, there's nothing magical about the

seven level. It's it's it's psychologically it may be important, but um, you know, basically the stories of have pledged to allow greater market forces for the exchange way, and ironically that's what they're doing, and ironically that's what the US is probably going to complain about. Now. You know, we've always had Mr Trump, I think, tweet about currency manipulation, etcetera. But and yes, exactly again, I say, look, this is it's not manipulating. This is this is this the market work.

This is the markets being very negulenting him. This is actually a really good point in. Jonathan Farrow was going on about it this morning about how this is not as assarily China devaluing the UN and is allowing the UN to just sort of fluctuate and exist within its market forces. So, uh, the fact that you're reiterating that is an important and powerful point I am wondering going forward.

I remember once upon a time people used to talk about central banks and sort of the reaction function there, and certainly even President Trump saying, uh, you know, as anyone look at currency manipulation, Hey is the Fed watching? Do you think that this will induce the Fed two cut rates further in order to weaken the dollar or for example, the e c B as well. Well, that's a very good question, and let me take this two

things separately. Um said, Uh, it runs monetary policy for the for the U. S. Economy, but it's it's been taking on a greater focus on quote unquote international and global factors. We know that, you know, twenty years ago global factor would barely get mentioned, but it's obviously clear and they started under yelling that that international and global conditions are very big important part of the fans reaction function.

Now Mr Power setted himself yet last week he said, look, we're the biggest thing that we are uncertain about is is the trade war. We don't know how to deal with this. This is a very uncharted territory. And he admitted that. And I think that's that's said. I would admit the same thing for US analysts. That's it's it's hard to analyze what the dollar it should be doing

within this context. That said, the Mr Power gave him once uh by cutting race and he was I thought on target when he said, look, let's see how the data come in. UM. Think the markets, your your w I r P page is showing chance of a cut in September. UM, and I think that overstates the case. I also think I would also point out that the fret in the futures market is pricing in three more cuts now by the end of the year. Uh. That to me is like a recession those settings. I don't

think we're there yet. Obviously, recession risk has risen, but I don't think the Fed is is panicking yet. Um. Then you know you over the whole candle worms is are they giving into the try Mr Trump and Trump doing this on purpose? It's it's really crazy. Um. Yeah, there's a lot of a lot of angles here that everybody needs to try to get a hand along. Uh. Dr Winton, thanks so much. We're gonna have to leave

it there. Dr Winton, Global head of Currency Strategy of Brown Brothers Harriman in New York City, joining us on the phone. Well, according to our next guest, the connection between Trump and uncertainty and financial market angst has become very clear, oddly, making trunks digital communications a leading economic indicator. To get the latest, Let's welcome our next guest, Ben Brightholds. Ben is chief data scientists for Arbor Research and Trading

based in Chicago, Illinois. Ben, thanks so much for joining us. So, as you point out, Trump's tweets clearly impact the markets. Can just give us a sense of kind of what you think the relationship is and maybe how investors are are using this data. Yes, so what we're doing here is some you know, some fancy natural language processing of Trump's tweets that initially started out as really me having fun with the data about a year ago or so.

But ever since his uncertainty level measured via his tweets and the natural language processing and sentiment became so negative, we saw it start to actually impact not only what consumers and businesses are concerned about, but also Marcus now for the first time starting around May of this year, and we saw a heightened connection really between the rise and uncertainty across numerous topic be a trade, financial markets,

and now currencies. And what happened a week to two weeks later and be it the SMP five or one of the tightest connections really is to the short end of the treasury curve and really rate hype timing. Uh. And with that heightened correlation, it's it's really made Trump's digital communications an important leading indicator. And if I were to rate it, it would be from impacting most really treasuries at the moment, and um, now it's finally starting to bleed into risk as then I love the image

of you at your computer, like ha ha ha. Wouldn't this be fun to enter these words into a little system and see what it. You know, it shoots out bad or it shoots out you know, negative sentiment, and then you know, you realize that it actually was Wow, actually a real indicator. So I'm wondering with respect to its indications, how forward looking is it? So what we found looking at cross correlations, which is just fancy for

moving around the window. And the lag or lead is about a one to two week lead time with measuring the uncertainty, and we do that by numerous different different topics.

So we look at things like the so called witch hunt that's used a lot, and things like you know, talks about democrats, and we remove a lot of that try to getting down to the really what is important from an economic standpoint, so the overall economy, the federal reserve currencies, financial markets, and so on, and that grouping has about a one a two week lead time on most importantly rate hug timing short under the Treasury curve. And now we're starting to see the same thing within

SMP five hundred and and the VIX. So I think it's been a slow move, whereas in May of this year where we got this big burst in negative sentiment from Trump's tweets that started to impact mostly the Treasury curve.

And but that is now finally as businesses are indicating that they are getting um hurt un evidence by s M I s M non Manufacturing this this morning, as well as numerous other surveys UM via the different regional Fed surveys that is finally starting to really deteriorate and show that it could end up hitting the real economy. And the problem is economic data in the US has been coming in below average, and everyone's been hopeful for this rebound, but I think this added uncertainty is is

really starting to wear on investors minds. It's interesting here Bloomberg. I mean, even on the Bloomberg terminal, you can type in tweets by Trump and now I'll give you a listing of all the tweets, and or you can set up an alert to have any time the president tweets, you can get a message or an ib So investors clearly looking for this information. Ben, have you gotten a sense of maybe how investors are in fact using some

of the Trump tweets into their investment process. Yeah, so that's I mean, that's what we do UM here at Arbor Research and Trading has helped provide a lot of this content and data. And what we found is that there are those that are in putting this into their own be at modeling capabilities or models that that kick out their actual trading signals or ideas and then also subject to you know, from a subjective standpoint in terms of gauging risk that is now arising in this market.

They're pulling this information and just like we aren't connecting it to be at volatility like the VIX or volatility of treasuries and so on in order to get to

gauge for how much that is actually impacting the market. So, case in point, the US tenure note yield is down to one seventy six, about twenty six basis points on a month of a month basis, looking back about a month, and we can attribute about sixteen basis points of that twenty six basis point drop to this Trump and uncertainty via just some simple modeling of taking all this uncertainty

measures and connecting it with major economic data releases. And so it is having an impact and I think being able to gauge how much it is impacting markets and then what that lead time is um You know, it's important for investors, and we're seeing that because the equity markets for the first time in a long time are finally being impacted by by this so called Trumpian uncertainty. So what exactly does a data word processing function look like?

What's it looking for? Has it? Has it? Great things? Sure. So what it does is within natural language processing, the key is a dictionary or you know, so called a lexicon, and what you know is a practitioner here. What we need to do is go out and find those words that have the meaning that you think they do um

and contextually. So what we do is work with a variation of something called the law Law Frun McDonald lexicon, which is very financial based, meaning that will have low misclassification rates in picking up words, for example, that are mean uncertainty um, and they really do mean uncertainty in

the financial standpoint. So that can be simple things like picking up on words of uncertain confusion, unproductable, and words like this, and then basically scoring them um on their frequency that as they exist, and then contextually how they exist within a given statement, be it a um, you know, a paragraph, or even just an individual you know, set comment.

So those get summed up um with each day or each tweet, and then we're looking essentially at that aggregate to get a flavor for how much uncertainty or if it's a sentiment, we're looking for how negative or positive it is is Trump or whoever. We're measuring using words that are favorable or unfavorable towards their target of what they're talking about. And again that's all summed up with a kind of a simple scoring mechanism to get to an aggregate number to then measure quantitatively so we can

use this information. Ben bright Holds, thank you so much for being with us. Really appreciate it. Ben bright Holds is a data scientist, chief data scientist at Harbor Research and treading talking about how not only does President Trump tweet, but now you can measure it and put it into your algorithm and trade off it, which is sort of, uh, you know, this is something that people have increasingly been doing, and the question is just what does it actually indicate.

The idea that it's got a pretty close correlation with rates shouldn't necessarily be entirely surprising given how trained his focus has been on the Federal Reserve. President Trump giving comments at the White House following the deadly shootings over the weekend UH that took the lives of twenty nine people. President Trump proposing a number of measures in response, saying that there is a need for a bipartisan solution to

identify an act early on warning signs. He really indicated an intention to work with social media companies and put part of the onus on them. He also talked about video games, which is sort of interesting to see what he might do there. And then of course mental health, calling the perpetrators of the senseless crimes as mentally ill monsters. Joining us down to talk about what the potential policy implications are of his comments, Frank Wilkinson, Bloeberg Opinion editor

and Anna Edverton, Bloomberg Coggressional reporter. Frank, I want to start with you what stood out the most. What stood out the most to me was that he actually did what he needed to do, which for him, he needed to denounce racism, and he did that very clearly up in the beginning. He said the words white supremacy. Uh. So you know that was a step for him. That

was the most important thing he did. I don't, frankly take the policy uh solutions offered as anything even remotely serious, but the cultural concession that he made at the beginning about racism was important and I think it will help him and I agretain. We want to bring you in and get your thoughts on the per perhaps some policy implications here. UH, give us just give us a sense of where you think, uh, any type of gun legislation um might be right now, what the future could be.

There are two bills that the Democratic led House of Representatives has passed this year. They passed h R eight, which would close the so called gun show loophole, which would require background checks for all gun purchases, including a gun shows and online. The other bill that they passed was called HR one twelve. They closes the so called Charleston loophole, which makes it mandatory for any background check to have at least twenty days to be completed before

the gun purchase is completed. Now that's currently three days, which was how the shooter at the Charleston church years ago was able to purchase a gun. Those bills have been passed by the House of Representatives and have not been taken up by the Republican led Senate. So if there were to be very bipartisan, common sense gun control legislation that's ready to go today, it would be those two bills. The President notably didn't mention those bills or

any proposals that even resemble those bills. He did step forward to say that red flag laws could be on the table, which was something that came up in response to Parkland and certainly would be welcomed by gun control advocates, but is certainly seen as not um, not adequate to

respond to this, to this violence in our country. Frank, I want to go back to your point, because it really stands out to me that the most important thing, from your perspective is less the policy proposals that may or may not really be developed upon, but rather President Trump's decision to denounce white supremacy and talk about white supremacy and racism in one breath in his words. And I'm wondering, why do you think he changed, because he has sort of avoided could deemning this in the past.

He has very clearly and um, it's beginning to cost him. That's one reason. Uh. So we have political costs in a lot of American suburbs where white women in particular are expressing some very strong discomfort with him on the issue of race. And uh we have had, of course the last couple of weeks where he used quite inflammatory language to denounce four members of Congress and then subsequently

denounced another member of Congress, all of whom we're non white. Um, there's not really a debate anymore among most people about what his strategy is, and in fact, some of his White House staff have been fairly explicit about it. So, you know, for him to to come out and say, Okay, I am drawing a line. I am not going to wink at white supremacy in this case. I'm not going to you know, just kind of nudge nudge as I have in the past. I'm actually going to denounce it

because something has gone seriously too far. I think that's an important development for him. So, Anna, what is the sense in Washington right now about these bills that are sitting on the Senate's uh floor or on the desk of the senators. Will it in fact move forward or will the events of this weekend perhaps you know, when this Congress gets back maybe open up new negotiations. Well, that's one thing I was looking for from the President's speech today, whether or not he would show any openness

to these bills, and he didn't. And so that to me says that Mitch McConnell has very little incentive to actually take up these bills, and it's going to be a very awkward position for the Senate majority leader. He has taken great pride in declaring himself to be the grim reaper of democratic legislation and that he has been able to kill all bills that have been passed by

the House of Representatives. That's not playing well for him right now, and the Republican led Senate is going to come under a lot of pressure to do something besides just approve the president's nominees for judicial positions. There could be some negotiation and red flag laws. As the President suggested this morning, he would like to pair gun legislation with immigration reform, which is absolutely not going to happen.

They couldn't even get immigration reform that was supported by Republicans through the Republican lead House, like Republicans couldn't get on the same page about this, So to think that that could be those two very controversial issues could be paired together and become law is just absolutely not going

to happen in this Congress. Frank President Trump did mention guns, saying that there should be rules to prevent people who are at grave risk to public safety from getting access to firearms and to allow law enforcement to seize them quickly, just real quick. Do you think that there's anything in that that has teeth or is that just sort of flip service. I doubt it, And here's why, because of

the context it was in. I mean, when when you start mentioning mental illness, which the United States has no greater propensity than any other nation, when you start mentioning video games, which Europe and Japan have just as much as we do. Clearly, video games and mental illness are not the issue that separates the United States from the rest of the O E c D countries in terms

of guns. What separates us are our gun laws. And if you're not going to address the gun laws and you're bringing out these red herrings of mental illness and UH and video games, that that's a different story. Frank Wilkinson, UM Bloomberg Opinion Columns, thank you so much for joining us here in our Bloomberg and Ractor Broker studio. And and and Edgerton, congressional reporter from Bloomberg News, joining us from studios in Washington in d C. Thanks for listening to

the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney and Lisa Brahm Woyd's I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio