EWJV - Weekly Commentary: The Typical And Atypical
2025-05-03 03:40:13 ET
Summary
- In a way, it's all coming down as it typically would.
- In high-risk speculative market environments, the specter of a big short squeeze and unwind of hedges captivates the marketplace, from day traders to the sophisticated levered players.
- Despite mounting financial pressure, China says it won't negotiate until the Trump administration shows 'sincerity' by canceling tariffs on its goods.
In a way, it's all coming down as it typically would. "Risk off" gains sufficient momentum to spark destabilizing deleveraging. Markets approach the abyss, before well-timed policy responses trigger a powerful market recoil. Huge bearish derivatives positions - for hedging and downside bets - foment instability. On the market's downside, the sellers of put options and other market "insurance" must dynamically hedge their exposures, with selling begetting market weakness and additional sales. A policy response then forces these sellers to immediately reverse course and become urgent buyers.
Especially in high-risk speculative market environments, the specter of a big short squeeze and unwind of hedges captivates the marketplace, from day traders to the sophisticated levered players. The greater system risk and fragility, the greater the potential for a disorderly upside unwind of shorts and hedges. To that end, when it comes to quick trading profits, no market dynamic can compete with being on the right side of a squeeze. And what begins as a short squeeze tends to take on a life of its own.
Typically, the confluence of policy responses, squeezes, unwinds, and dip buying revitalizes speculative impulses - ensuring another leg higher for an irrepressible bull market. Market dynamics have been pretty much business as usual thus far. But this is too much of a uniquely abnormal environment to extrapolate typical market dynamics.
There's so much at stake. The administration and global policymakers have settled into crisis management mode. Fragile markets require a steady drumbeat of positive headlines. Tensions must be ratcheted down. Even in the face of what will be heated negotiations, tones need to be more conciliatory.
"Trump says he has 'potential deals' with India, South Korea, Japan." "Lutnick: 'I have a deal done, done, done, done' as China, Japan and India warm to trade talks." "Trade deal with India soon: Vance." "Japan Seeks US Trade Deal in June Amid Report of Standoff." "China 'evaluating' US offer to negotiate tariffs; Beijing's door is 'open.'" "China says it's evaluating the possibility of trade talks with the U.S." "China Hints at Possible Thaw with US in Weighing Trade Talks."
May 2 - New York Times (David Pierson and Joy Dong): "Despite mounting financial pressure, China says it won't negotiate until the Trump administration shows 'sincerity' by canceling tariffs on its goods. In a potential softening of the bruising trade war between China and the United States, Beijing said on Friday that it was considering holding talks with the Trump administration after repeated attempts by senior U.S. officials to start negotiations. China's Commerce Ministry said… China was 'evaluating' the U.S. offer to talk, but it said Beijing's position remained consistent: It will only engage in negotiations if Washington cancels its tariffs on Chinese goods first. 'If the United States does not correct its wrong unilateral tariff measures, it means that the United States has no sincerity at all and will further damage the mutual trust between the two sides,' the ministry said."
It's imperative that the U.S. and China begin talks. Both economies face major risks, and clocks are ticking. But I doubt China is softening its position. From the look of China's Ministry of Affairs Tuesday "Never Kneel Down" video, I'll assume they're dug in for tough and protracted negotiations. But these 145% tariffs are essentially an embargo. Stating an openness to commence talks puts pressure on the administration to back down on clearly unworkable tariff levels....
Weekly Commentary: The Typical And Atypical