Attention on Trade and Tariffs topics rose somewhat, but the inclusion of coronavirus language proved a distraction to the stories being told about them rather than a unifier.
More importantly, we think that the Phase 1 agreement between US/China led to a far more positive, Pollyannaish narrative structure on Trade.
We think that the fatigue over Trade news and the vacuum of the generally weak narrative structure in Q4 created a readiness to move on to other topics, including events like Iran and coronavirus.
We still have no edge (and believe it is impossible to have an edge) predicting long-term trade deal outcomes, but we are concerned that the Trade narrative is highly complacent, more likely to respond surprisingly to bad news than good.
We think any asset owners / managers with active positions on exposed assets should manage their risks accordingly.
Despite the recent erosion in attention and cohesion across all macro themes, we think it remains Common Knowledge that the Trade War is what matters to risky asset markets.
Most of the erosion in cohesion is related to changes in topical language rather than changes in tone. Trade commentary is increasingly focused on USMCA, France and Brexit as opposed to China, where there have been fewer recent developments.
The most central clusters have become more cohesive around a focus on autos, energy technology (esp. solar) and aerospace. Agriculture, consumer products and other equipment are less central to overall trade and tariffs narratives.
We still see very little of the existential / military language we see as a canary for a transition of this Game of Chicken to a more predictable political game. Accordingly we do not favor significant active risk positions on Trade and Tariffs views.
Nearly all our major macro narratives have sharply lower attention and cohesion in the month of November – Trade and Tariffs are no exception.
We do not wish to overstate this. Even after this erosion, it remains Common Knowledge that the Trade War is what matters to risky asset markets.
The erosion in cohesion is, perhaps, the more interesting. We are observing increasing polarization in the narrative structure.
The visualization on the following page does a good job of presenting this. The east quadrant is defined by the language linking positive, optimistic and hopeful takes on the Trade War. The central, west and south regions are generally less constructive.
It is instructive to us that the constructive clusters are less connected to the overall story being told. Regardless of sentiment scoring, we think that the current game of chicken Common Knowledge is that the Trade War isn’t and shouldn’t be a source of hope.
It is Common Knowledge that the China Trade War remains the most important risk/event to other investors.
The emergence of and resulting distraction form two additional core market topics, however, has meant that the attention on Trade War narratives has ticked down from our maximum level for the first time in month (see additional attention graphs below)
2020 Election Politics and Impeachment; and
The Implications of a Failing IPO Market.
Our core view remains the same: this is an unpredictable Game of Chicken that warrants very little use of investors’ respective risk budgets. • • The fall in attention and stabilizing sentiment also leaves us concerned that many investors may be somewhat complacent about how risky assets would react to a return to negative trade news or political escalation.
We think there is common knowledge in US risky asset markets that the China Trade War is the most important risk/event to other investors. We think interest rate / central bank narratives are derivatives.
We furthermore believe that the “Tweetstorm-sensitive” mechanism whereby shorter-horizon investors are updating estimates of these outcomes has itself become common knowledge.
Everyone knows that everyone knows that Trump’s trade tweets move markets.
Other than perfunctory, peripheral coverage of Chinese missile parades, we still do not see (1) national security issues or (2) a transition to a pure domestic political game in this narrative structure.
That means we still think this is an unpredictable Game of Chicken that warrants very little use of investors’ respective risk budgets.
As we mentioned in our last research note, while not complacent, markets entered August with what we think was a more-confident-than-warranted view of the general direction of the US/China Trade War, which remains a Game of Chicken.
President Trump’s stridence on tariffs led to a few things, in our view:
The evaporation of any hint of complacency about trade and tariffs resolution. If there was a short-term asymmetric bet on downside vs. upside outcomes, we think that opportunity has passed – and perhaps flipped into “alarmism.”
The sharp increase in negativity of coverage, to its lowest points since we began tracking it. Coverage has been deeply pessimistic and concerned.
An increase in cohesion from trough levels, as varying probabilistic “prediction” markets on the trade war gave way more universally to coverage asserting or implying that (1) Trump might not be a friend to markets, even for political reasons, and that (2) rates needed to be cut by more than expected to prevent the negative impact.
We think there is common knowledge in US risky asset markets that the China Trade War is the most important risk/event to other investors. We think interest rate / central bank narratives are derivatives.
We received a couple comments from readers that they found the different presentations for the charts and for the raw signal data for Sentiment and Attention confusing. Thanks! And we agree.It’s confusing.
We’ve accordingly updated July monitors below so that (1) sentiment charts show the same rolling 3-month values we provide in the data spreadsheet rather than our spot calculations and (2) the attention charts show fixed historical values as per the data file, rather than a dynamically updated series to reflect the changing long-term average. No changes to the raw XLS data.
If you would still like to see the faster/dynamic presentations of the signal data, let us know. Otherwise, our plan will be to keep it as simple as possible.
Access the Powerpoint slides of this month’s ET Pro monitors here.
Access the PDF version of the ET Pro monitor slides here.
Three things happened to Trade and Tariffs narratives in July, leading up to a rather eventful start to August:
Attention remained at record high levels under our measure. The supreme importance of the Trade War remains THE market narrative.
Our spot measure of sentiment rose, as expectations of a thawing / cooperative resolution generally strengthened.
Cohesion continued its fall, as (1) new voices, including Chinese perspectives, entered the fray with different narratives and (2) topics veered toward Brexit and US/EU trade issues.
The result was that, while by no means complacent, markets entered August with what we think was a more-confident-than-warranted view of the general direction of the US/China Trade War, which remains a Game of Chicken. As we said in June, take risk on their unpredictable outcomes at your own peril.
We recommend reviewing Ben’s brief note sent on Monday, August 5th for our views updated following the early month volatility.
Trade and Tariffs continues to be the dominant narrative; it sits at our maximum attention level for the second straight month.
As with last month’s update, we believe that these narratives are deeply connected to language and narratives about central bank policy and the rationale for expected rate cuts.
The cohesion of these narratives, however, has fallen fairly sharply. We don’t think this means that it isn’t dominating the market’s attention – we think it means that more missionaries are joining the fray to promote their own narrative.
We are observing a more strident embrace of global narrative promotion by the Chinese.
We are observing some confusion in US media on how to integrate President Trump’s demands for a rate cut with celebration of the strength of the economy and market (the transformation of US/China into a Political Game is still present, if muted).
For now, we are not seeing the same existential saber-rattling. It is a short period, so we would not overreact. Still, some aspects of a now-global narrative war begin to look more like a Game of Chicken again. Take risk on their unpredictable outcomes at your own peril.
Consistent with our suspicions from our prior monitor report, attention to Trade and Tariffs narratives soared to their highest level since we began tracking the topic – nearly every article written about financial markets had some attachment to trade war discussions, whether as explanations for May returns or as an explanation of macro drivers.
The growth in attention, however, exceeded our expectations when President Trump doubled down on his threats with Mexico tariff rhetoric and when administration officials in both the US and China accelerated geopolitical and national security rhetoric.
This is no longer a complacent narrative structure.
It is also no longer a Game of Chicken. It is a geopolitical game in which the political outcomes may permit a lose/lose choice by both parties on trade.
Trade and Tariffs and Central Bank Omnipotence narratives are intertwined. This leads us to believe that the “Fed put” narrative structure is specifically complacent about a rate cut response to trade war concerns.
For much of April, cohesion continued to drift downward, as trade and tariffs discussions splintered further into distinct Europe, North America, China and now US/Japan trade clusters.
Meanwhile, sentiment remained noticeably more positive than in the recent past, leading us to believe that the narrative structure was still highly complacent.
In early May, a couple well-placed tweets from President Trump very briefly showed some measure of the volatility-inducing potential of negative surprises on this complacent narrative structure.
We suspect that focus will return to China/US trade discussions in May, and we would not be surprised to see sentiment retreat somewhat.
Will the complacency about a positive outcome stick around? We think it will be heavily influenced by whether the additional tariff threat is a true negative surprise or a manufactured “wall of worry.” We lean toward the latter, but that is opinion and not something we necessarily see in the narrative data.
While cohesion of Trade and Tariffs narrative remains high from a quantitative perspective, our evaluation of the language itself leads us to believe that it is decidedly complacent.
The existential language being used for months has faded, and the center of global trade and tariffs discussions in March wasn’t even the China-US trade discussions – it was Europe!
The narrative IS about cars and soybeans and farmers and blue collar workers again, and less about national security.
What does that mean?
It means that if you have a divergent (i.e. more negative) odds view on outcomes, you may have asymmetric payoff opportunities.
We still don’t think anyone ought to have strong confidence in such an view on the odds on outcomes.
But it does strike us as asymmetric for those capable of taking advantage of complacency about a positive US/China trade resolution.
Cohesion around Trade and Tariffs narratives has gone into some decline in early 2019, in our view because (1) markets are more clearly discounting a positive outcome and (2) because central bank omnipotence has taken over as the primary governing narrative in the U.S.
The effect is a narrative map with more distance between discussions of equity and credit markets and discussions of trade – we note that the trade discussions continue to be high stakes and loaded with national security language.
The narrative still has decent cohesion, but coupled with the spike in sentiment, we would feel comfortable calling this an increasingly complacent narrative structure from a markets perspective.
What does that mean?
It means that if you have a divergent (i.e. more negative) odds view on outcomes, you may have asymmetric payoff opportunities.
We still don’t think anyone is likely to have justifiable confidence in such an view on the odds on outcomes.
Attention on Trade and Tariffs is now as high as we have measured it. This is the most central issue to the narrative of US financial markets – even more so than rates.
Some of this further increase appears to be related to conflation of discussions of China-US trade concerns and general concerns about a slowdown in Chinese economic growth.
Our main areas of concern, however, have grown – the strongest trade and tariff narratives are not about agricultural and automobile tariffs, but national security and intellectual property. The more fundamental trade issues have moved further from the center of the core narrative.
Overall sentiment has ticked up slightly on the back of occasional leaks of optimism, but the sentiment around these core national security and IP issues is negative and focused on lack of progress.
The focus on a China Trade War narratives accelerated even further in December.
As in our November update, we remain concerned with the conflation of the trade narratives with national security issues. Words like “Nuclear” and “Troops” are very connected and near to the core in December, just as “Taiwan Straits” and “South China Sea” were core in November.
We think this has the potential to maintain the heightened focus of markets on this topic.
As outlined in the In Summary note from January 6, however, we think that the emerging connectivity between trade/tariffs and central banking communication policy will be worth monitoring. We remain cautious about active risk-taking on trade/tariff themes, but with the current narrative structure would revisit this view based on communication from central bank missionaries linking those themes with interest rate policy.
Thanks to a remarkably concentrated November point-in-time measure, our attention measure rose sharply.
There is now an emerging narrative around tariffs and trade: they are a national security issue. This has the potential to be a powerful switch in rhetoric, leveraging a meme with strong emotional content to attach tariffs to territorial conflicts, intellectual property disputes and cybersecurity concerns.
We would be very mindful of the ability for this pivot to sustain trade policy that might otherwise be unsustainable and unpopular.
While Brexit has obvious trade implications, it has been surprisingly undercovered as a trade issue. Outside of its impact on bank sustainability, it is currently almost completely divorced from any trade narratives and is not something we would expect to exert significant influence on ex-UK financial markets unless there is a material and surprising event.
While it is only a single data point, our October attention measure rose from its very low base over the prior three months. Our aggregate rolling measure of that attention remains low.
Similarly, sentiment and language in articles about Trade and Tariffs have continued to be very negative in comparison to more benign and technocratic coverage of the issue in late 2017 and early 2018.
The sub-themes that are being most attached to markets, positioning and stocks are also the ones that have emerged with the strongest connectivity to all other themes: National Security. We think this is important. By attaching trade and tariff issues with China to territorial disputes, IP and cybersecurity, narratives here could take on a lot more influence in the minds of allocators and investors.
While our measures of fiat language and advocacy journalism rose in the February/March concern about tariffs, we have not yet observed that in the most recent uptick.
