When reports emerged last week of a low-level Chinese delegation coming to meet with members of the Treasury department ahead of what the WSJ described would be a November trade summit in the US, stocks spiked and yields ran up (they have since tumbled with the 2s10s yield curve collapsing to just 20 basis points) on hopes that the long-running trade feud between the US and China may finally be coming to an end.

Skeptics laughed and said that after three rounds of failed trade talks, the fourth one would be no different.

The skeptics were right because after the conclusion on Thursday of the second day of the closely watched trade talks between the U.S. and China, there was “no major progress” according to Bloomberg, with the stage once again set for further escalation of the trade war between the US and China.

Worse, according to the Bloomberg source, not only are no further talks scheduled at this point but the Chinese officials have reportedly raised the possibility that no further negotiations could happen until after November’s mid-term elections in the U.S.

The White House issued a statement which said the countries “exchanged views on how to achieve fairness, balance, and reciprocity in the economic relationship, including by addressing structural issues in China” identified by the U.S. in an investigation into Chinese intellectual-property practices. The Chinese commerce ministry was even more terse, stating that two nations had “constructive, candid” communication, and will keep in touch about the next steps.

Translation: nobody was willing to compromise by even an inch.

Here’s what happened according to the Bloomberg source:  the U.S. Treasury presented a revised version of the “provocative” list of demands presented by the Trump administration when the two sides had their first high-level meetings in May. The Chinese delegation, meanwhile, showed no signs of bringing any significant compromises to the table this week

Even relative doves inside the Trump administration have begun pressing for China to make significant structural reforms by unwinding industrial subsidies and at least scaling back its “Made in China 2025” plan to lead the world in industries such as artificial intelligence and robotics.

Yet the Chinese side has continued to offer only increased purchases of American commodities aimed at reducing the U.S. trade deficit, believing that is the best tactic to try and see off further U.S. tariffs, said the person familiar with the discussions.

In other words, back to square one.

The lack of any progress is understandable: as we reported earlier, Trump is convinced he is winning the trade war by simply observing the level of the stock market and the bear market in Chinese stocks.

Meanwhile, for China “resistance” to Trump has become an issue of nationalistic pride with local media issuing increasingly more harsh and acerbic comments aimed at the White House; furthermore China may be observing the political fiascos engulfing the US president and may be growing more confident that it is only a matter of time before Trump is forced to fold. Beijing is also confident that after a humiliating – for Trump – midterm election outcome, the president will have no choice but to come to the negotiating table waving a white flag.

Whatever the case, the Chinese came, saw, and nothing happened.

The conclusion of the pointless two-day talks came just hours after Beijing and Washington rolled out their latest round of tit-for-tat tariffs on Thursday in which $16 billion in imports hit by each side took the total value of goods covered as a result of President Donald Trump’s trade war with China to $100 billion.

And with no progress on trade war negotiations, the Trump administration is now set to enact a far larger tranche of tariffs covering some 6,000 products from China with an annual import value of $200 billion that are expected to take effect as early as next month.

But while the US stock market has so far ignored the threat of a global economic slowdown as a result of relentless trade war escalation, this time it may be forced to pay attention:

That move and the anticipated retaliation from the Chinese would mark the largest escalation so far of the trade war between the two economies and take it into new territory in terms of both scale and by starting to hit American consumers more directly.

Clearly oblivious of any downside risk from further escalation, Trump on Thursday highlighted new tougher restrictions aimed at Chinese investment in the U.S. at a White House event and said he was committed to continuing his trade fight against China.

“We can’t allow the things that were happening to happen,” Trump said during a meeting with legislators.

Pouring fuel on the fire, Trump further accused Beijing of engaging in currency manipulation, long one of the most sensitive points of friction between the two countries.

What are the immediate next steps?

According to Bloomberg, U.S. officials will next meet in Washington on Friday with delegations from the European Union and Japan “to discuss joint efforts to confront China at the World Trade Organization over its industrial subsidies and the conduct of its state-owned enterprises.” How China will respond to the US trying to gang up on it is unclear, but it will hardly welcome the pivot.

But of greater concern for risk assets is that trade hawks including US trade rep Robert Lighthizer are eager to move forward with plans to impose tariffs on the additional $200 billion in Chinese imports: the goods to be covered in the next round of tariffs range from chemicals, raw materials and seafood to vacuums, bicycles and furniture. The U.S. could impose the duties after a comment period ends Sept. 6.

The next escalation round – which is now virtually assured – takes place even as US corporations are becoming increasingly vocal against the ongoing feud, amid concerns for their profitability: in hearings this week in Washington, U.S. companies and industry lobbyists have been offering their mostly negative feedback on the proposed additional duties of as much as 25 percent.

“This is a political game being played with my company as the game piece,” Ross Bishop, president of BrightLine Bags Inc., testified on Monday. The California-based company makes nylon gear bags for pilots and other customers, and Bishop pleaded with the trade panel to “help me keep my company alive.”

All of that is irrelevant, however, as long as the US stock market keeps rising, which it will: recall that August is the peak month for buybacks…

… while Chinese stocks drop further into bear territory and the yuan resumes it slide to 7.00 and beyond: a number, which based on the latest price action – despite the recent interventions by the PBOC aimed at crippling the shorts – should be hit in very short notice.

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