Trump Talk & 'Thucydides Trap' Threat Triggers Market Mayhem Overnight

Traders are waking this morning in the US to some relative market mayhem and questioning what came first - the oil spike or the geopolitical angst - to trigger these moves as it appears the market finally remembered there's more going on in the world than trading 'short compute' demand to the moon...

Oil prices are up significantly (WTI >$100)...

Bond yields are breaking out everywhere (10Y 4.5%, 30Y UST 5.10%!, 30Y Gilt 5.82% - highest sine 1982)...

Equity markets sharply lower overnight (Kospi -6%, Japan Semis  approx. -5%, Japan momentum approx. -2.5% Nasdaq -1.5% as levered ETF exposure and high concentration clearly exacerbating the sell off)...

The catalysts are intertwined with what appears to be a nothing-burger in terms of outcomes from Trump's trip to China (exacerbated by Xi's not so hidden threat) and Trump's comments on the Strait of Hormuz..

China Summit

As Goldman Sachs one-delta desk-head, Rich Privorotsky, notes this morning, the Xi/Trump summit appeared to yield little in the way of immediate tangible outcomes.

Despite all the positive rhetoric, Boeing sank,  KWEB closed -4.6%, the details around NVIDIA H200 exports remain murky and even some of the headline “wins” looked shaky.

Reuters reported that Chinese customs “halted export clearances for hundreds of U.S. beef plants” just hours after approvals had seemingly been renewed during the summit. 

For now this still looks more like stabilization than a durable reset. 

Feels like the US side came hoping for transactional risk deals while China was looking for a broader multi year reset and foundations for more constructive dialogue.

The references to the “Thucydides Trap” did not go unnoticed either:

Xi invoked whether China and the US could “transcend the so-called Thucydides Trap” (the theory that when a rising power threatens to displace an established great power, war becomes highly likely).

...very deliberate language and clearly aimed at framing this as something much bigger than tariffs or trade.

Trump later had to go on a posting offensive clarifying that he must have been referring to the Biden administration...

When President Xi very elegantly referred to the United States as perhaps being a declining nation, he was referring to the tremendous damage we suffered during the four years of Sleepy Joe Biden and the Biden Administration, and on that score, he was 100% correct. Our Country suffered immeasurably with open borders, high taxes, transgender for everybody, men in women’s sports, DEI, horrible trade deals, rampant crime, and so much more!

President Xi was not referring to the incredible rise that the United States has displayed to the world during the 16 spectacular months of the Trump Administration, which includes all-time high stock markets and 401K’s, military victory and thriving relationship in Venezuela, the military decimation of Iran (to be continued!) — Strongest military on earth by far, economic powerhouse again, with a record 18 trillion dollars being invested into the United States by others, best U.S. job market in history, with more people working in the United States right now than ever before, ending country destroying DEI, and so many other things that it would be impossible to readily list.

In fact, President Xi congratulated me on so many tremendous successes in such a short period of time.

Two years ago, we were, in fact, a Nation in decline. On that, I fully agree with President Xi!

But now, the United States is the hottest Nation anywhere in the world, and hopefully our relationship with China will be stronger and better than ever before!

However, as Privorotsky noted, the market probably came in pricing deal momentum and instead got managed coexistence. 

That is still positive in macro terms, just less catalytic for risk assets immediately.

Now, to the second part of the double-whammy...

Oil

This is where Privorotsky says 'the rubber meets the road.' 

Feels like the US held back from escalation ahead of the China summit, hopeful Beijing might lean on Iran to de-escalate.

But China’s messaging remained diplomatic rather than forceful, saying “the most urgent issue is to keep the ceasefire” and calling for “good-faith negotiation between the two sides.” 

Trump said he and Xi agreed that Iran cannot have nuclear weapons, returning market focus to the ongoing closure of the Strait of Hormuz.

Reopening the waterway has been a key objective for the US in diplomatic efforts since a ceasefire between Washington and Tehran took hold about five weeks ago. But Iran insists it keep an oversight of traffic through the maritime chokepoing as part of any peace agreement, stoking fears of a prolonged disruption in energy exports from the Persian Gulf.

Trump oscillated between threatening further attacks on Iran, including in a Truth Social post between meetings with Xi, and insisting the US does not rely on energy imports through the Strait of Hormuz.

“They need the Strait more than we need it open, we don’t, we don’t need it at all,” Trump said in an interview with Fox News.

Trump says US is “doing it to help Israel and to help Saudi Arabia” and other gulf allies.

“It also helps China”

That comment triggered a jump in crude prices, rise in the dollar, and drop in gold...

For now, it appears the combination of Trump's nonchalance about the Strait and the over-arching geopolitical threat from Xi (combined with a disappointing outcome from the talks in terms of tangible trade deals) are enough to trump the Gamma Squeeze in AI/Semis (so far).

So now the question becomes:

Does the US feel compelled to escalate further (with China... or Iran)?

Markets are understandably skittish into the weekend risk window, which combined with the options expiration removing a chunk of positive (stabilizing) gamma, leaves markets more free to move (up or down).