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Market Spooked By Upcoming “Bad Cop” Pence China Speech

Courtesy of ZeroHedge

At roughly the same time that today's Boeing news hit, revealing that instant messages by Boeing employees in 2016 indicated employees misled the FAA about a key safety system on the 737 Max sending both BA stock and the broader market sharply lower as the biggest Dow component tumbled, a second report also hit which added to the risk-off sentiment.

At 12:20pm, Reuters reported that Vice President Mike Pence planned to deliver his second major policy speech on China next Thursday.

However, with the market focused on the fallout from the Boeing news, this report was mostly lost in the noise.

As Reuters reported, Pence would deliver the remarks for the Wilson Center at the Conrad Hotel in Washington, about a year after he harshly criticized Beijing in an address at the Hudson Institute think tank, a speech that was widely viewed as the most critical remarks by such a high-ranking U.S. official in recent memory. The address will "reflect on the U.S.-China relationship over the past year and look at the future of our relationship," Reuters noted.

And while the tone and sentiment of Pence's speech are unknown, what is well known is that the vice president has traditionally been an outspoken hawk when it comes to China. As such, as Vital Knowledge pointed out, "If Pence's speech this Thurs about China is anything like his one from Oct 2018, the markets will NOT be happy"

And sure enough, they were not:

As a further reminder, the vice president has scheduled to deliver a human rights speech on the anniversary of the Tiananmen Square massacre in June, only to have it canceled by Trump himself so he could secure a meeting with Chinese President Xi Jinping in Osaka.

As Reuters further notes, Pence's speech will be delivered just weeks after President Donald Trump gave a vague outline of the first phase of a deal with Beijing and suspended a threatened tariff hike, signaling a thaw in trade relations between the two countries. But that same week, Washington put Chinese video surveillance firm Hikvision and dozens of other Chinese entities on a blacklist to punish them for the treatment of Muslim minorities, ratcheting up pressure on Beijing over human rights issues.

The risk is that despite the mixed signals, "many China watchers see Pence’s role as playing “bad cop” on China, so that Trump can shift his tone as he sees fit to strike a deal with Chinese President Xi Jinping."

So would Pence double down on his recent hawkish sentiment, or would the Veep turn a page after the latest trade war ceasefire? As Bloomberg's Ye Xie notes, "if the U.S. purposely planned a speech by Pence calling out China before Trump and Xi meet in November, it won't help to foster trust."

That said, China has signaled that it's inclined to separate trade talks from national security issues, including Congress's Hong Kong bill. So a Pence speech attacking China wouldn't necessarily distract the "Phase One" agreement on trade.

If indeed Pence plans on renewing his criticism of Beijing, it won't help sentiment between the two superpowers, which may be precisely Trump's intention: consider that in recent days consensus appears to have shifted that US-China diplomatic conditions are improving. However, if the Fed agrees with this, the risk is that Powell will resume hiking just as Trump faces elections in one year's time, risking another market crash at a critical – for Trump's reelection – time.

As such, what better way out to extend the Fed's easing for another 3-6 months than to have "bad cop" Pence slam China, forcing Powell to remain dovish for the foreseeable future, and keeping stocks gravitating new all time highs.

 


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