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Today’s Points:

• Markets are back at records, largely because of optimism on US-China trade.
• The US is doing whatever it takes for Argentina — for at least another week.
• Crude oil has dropped to its cheapest in almost four years. 
• Japan’s LDP has found a coalition partner — so it’s Prime Minister Takaichi.
• AND: Alcatraz needs to escape from this project.

China Crisis

The US-Chinese trade war has been resolved again. That at least would appear to be the verdict of US asset markets. The scare that President Donald Trump caused with his threat of an extra 100% tariff on China to retaliate against export controls on rare earths didn’t last long. Over the past week, the S&P 500 has gained 2.8%, almost back to its record. It’s been helped by a 1.8% rally in long Treasuries over that time. 

Money changes hands on each presidential pronouncement. The rally to start this week was helped by Trump’s comment to CBS News that “I've been invited to go to China, and I'll be doing that sometime fairly early next year." He has also said that he expects to make a trade deal after meeting with President Xi Jinping at a Pacific Rim summit in South Korea later this month. That is deemed promising. And he also announced a deal with Australia to develop an alternative supply of rare earths, which should strengthen the US position in the longer term — but might also mean that China will think its chances will never be stronger.

The market frisson also demonstrated that it’s the conflict between the US and China that matters. The various other global trade conflagrations are deemed far less important, which makes sense as these economies are by far the two superpowers. This chart is from Dan Alamariu, geopolitical strategist at Alpine Macro:

(For an explanation of the fascinating concept of economic complexity, look here.)

Debate also continues to rage over exactly who holds the greater leverage. The US has the dominant companies that make the chips needed for artificial intelligence, headed of course by Nvidia Corp. But China, as it reminded everyone earlier this month, has rare earths, in which it has spent decades building dominance. It also has far greater ability to withstand pain than the US, as its leaders don’t have to win elections. The two sides have been steadily sundering their relationship for a while. This chart from Alamariu demonstrates that both Western European and US investors have long been deploying capital elsewhere:

Meanwhile, China has redoubled efforts to find alternative markets for its exports. The latest numbers show total exports at a record, even as sales to the US dip back to a level reached in 2018:

There are issues over whether China is essentially dumping goods on others. That could mean uneconomically poor margins for Chinese companies, and raise the risk that countries other than the US feel obliged to retaliate with tariffs of their own. But it has been helped, perversely, by the weak dollar. The yuan remains tied closely to the US currency, and that has made it far more competitive:

This means that China remains on course for the official government target of 5% economic growth for this year. It would be amazing if it missed this manufactured target, but it still suggests that Beijing has room for maneuver. It’s also managing to do this despite a slump in investment in infrastructure and manufacturing, the usual standbys. Both are falling in annual terms; that hasn’t happened in modern times outside the pandemic year of 2020:

These numbers suggest that the exports push can’t be hurting that much. Rory Green of TS Lombard suggests the two are closely linked:

Since the 1980s, gross capital formation and export growth have been inversely related. When foreign demand is weak, investment is promoted. If trade is surging, Beijing tapers stimulus. Consumption tends to be broadly stable. In other words, if exports had been hit harder, investment would be much higher. 

Both countries would prefer to avoid damage. China still appears better able to absorb more, though, if deals prove elusive. 

Don’t Cry for Me, Argentina…

Ordinarily, a US Treasury backstop in times of crisis is as good as money in the bank — or so Argentina’s President Javier Milei thought. The reality is proving far more complicated. Treasury Secretary Scott Bessent, who was already backing Buenos Aires with a $20 billion rescue package, is now wagering another $20 billion to buy pesos that he, surprisingly, considers undervalued.

But so far, not even Monday's signing of the promised lifeline has calmed investors, with the peso heading into a five-day losing streak despite Uncle Sam buying it. As things stand, this unconventional bailout, which is similar to the US rescue of Mexico in 1985, hasn’t fixed the damage. It has calmed but not eliminated extreme pressure in money markets. Argentina’s overnight BAIBAR rate for banks briefly spiked to 140%, but remains at 60%:

Ahead of crucial midterm elections on Sunday, the lifeline has calmed a developing market rout in the perennially fragile economy. But the peso, like Argentina’s bonds, quickly retreated after the initial positive reaction:

Bonds are exceptionally volatile, and responded dramatically to an announcement late in the day that the government planned to buy back 10-year bonds:

This might not rescue Milei at the polls. The peso’s continuing torment, even after Mario Draghi-esque whatever-it-takes rhetoric, is a bad sign. The critical question is whether Milei’s party, reeling from its bruising defeat in the Buenos Aires provincial election last month, can piece together a congressional coalition strong enough to insulate him from any attempt at impeachment.

His La Libertad Avanza party holds only a sliver of congress — roughly 15% of seats in the lower house and about 10% in the Senate. A strong showing would strengthen his attempt to push reforms through a hostile legislature.

But the US support comes with strings attached, as Trump has made clear. If Milei flops at the polls, the US backstop will no longer be there. The more investors sense the race slipping away from him, the faster economic confidence could erode. Polymarket’s odds on Milei’s chances of building the largest congressional delegation have receded all year, and dwindled again after the Washington rescue:

Bloomberg Opinion colleague Juan Pablo Spinetto points out that traditionally, Argentines are quite “anti-American and the idea of having Trump so involved may be very dangerous for the ruling coalition.” The question is whether Argentines will  reject Trump’s backing even if doing so risks an economic relapse.

I see more Argentines willing to vote against Milei's coalition because of the Trump association than Argentines saying, '”Oh I am now voting for Milei because Trump is standing  up to him.” But in the end, folks will vote on local issues — basically how much the economy is hurting them and how much they are willing to give Milei another chance. This isn't an election about Trump.

Investors are now gaming out possible post-election scenarios, and how each might reshape Argentina’s fragile recovery. Citi Research’s Johanna Chua expects greater forex volatility if the electorate rebuffs the current economic policies, and sees some parallels with the loss of momentum for the reformist president Mauricio Macri towards the end of his term in 2019.

Whatever Sunday’s outcome, a stable recovery will be hard without a weaker currency that narrows the current account deficit and allows Argentina to rebuild foreign reserves, Chua argues. As the chart from Capital Economics’ Kimberley Sperrfechter shows, the peso’s overvaluation has already fed into a widening current account deficit, preventing any meaningful accumulation of FX reserves.

Once elections are over, policymakers will try to balance reducing inflation and external competitiveness — which probably means a step devaluation and a new trading band. The peso is currently overvalued somewhere between 25% to 35%. Thus, there’s a long way to go once the political dust settles — and the US Treasury is unlikely to make a good profit on its money.

Even so, as Sperrfechter notes, while this policy mix would be the right move, itmight not fully restore external competitiveness. Should Milei’s party fare poorly, there is a real risk of a sharp and disorderly peso correction that would undermine Bessent’s assertion that the currency is undervalued. As Robin Brooks of the Brookings Institution notes, the Treasury secretary is hardly oblivious to the risk of the odds turning against him. That justifies making Washington’s support conditional. The election is merely the beginning.

—Richard Abbey

Oil on Troubled Waters

One factor that’s easily forgotten: The oil price is falling. Indeed, West Texas Intermediate crude has dropped to its lowest since early in 2021, well before the invasion of Ukraine. This makes it harder to spark new investment in US oil production; but it’s great news for keeping the most politically important US prices under control, and for taking the heat out of geopolitics:

There’s always room to argue about exactly how inflation baskets should be formed, but for politicians and behavioral economists there’s an argument that in the US, the price of gasoline is more important than all others put together. Many Americans have no choice but to spend much of their lives driving. The gasoline price varies and is displayed in luminous big letters by the roadside. It matters, and everyone is conscious of it.

Learning the lessons from the last few years, it’s not the rate of inflation that counts as much as the price level of the basics that people must buy. This is how the average gasoline price, as recorded by the American Automobile Association, has moved over this decade, in combination with the official consumer price index for food eaten at home. Both are up a little more than 25% since the beginning of 2020, but if food prices can just stay under some kind of control, it may begin to feel like the basics are at last getting cheaper:

There are a lot of moving parts at present. Tariffs could easily push up the price of goods, and the immigration clampdown could drive further services inflation. But the Trump administration has made cheaper gas a priority. It’s been sensible to do so, and appears to be getting what it wants.

Survival Tips

Now imagine a giant statue of a mythical figure instead. Photographer: Tayfun Coskun/Anadolu/Getty

I’d like to recommend this extraordinary story from Bloomberg Weekend about a plan to build a statue of Prometheus on the island of Alcatraz in the middle of the San Francisco Bay. It’ll be taller than the Statue of Liberty and will commemorate a figure who, in Greek mythology, was tortured by Zeus as punishment for hubris. Words fail. But you might want to listen to my favorite song about the island, The Romance of the Telescope. It’s about a prisoner trapped in Alcatraz scanning the beauty of the Bay from his barred window. It’s oddly wonderful. I can do without the statue, though.

More From Bloomberg Opinion

• Carolyn Silverman & Tim O’Brien: Will Trump Do It? It Pays to Bet ‘No’
• Shuli Ren: Gold’s ‘Semi-Rational’ Run Gives Wall Street Vertigo
• Daniel Moss: Glass Half-Full Economy Has Rarely Looked So Good

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