Risk assets are taking a knock after White House adviser Peter Navarro declared the trade deal between the US and China as over as President Trump has decided to terminate the deal.

Well, that changes things up a bit and the market thesis that that central-bank liquidity is all that matters will certainly be put to the test today.

Dust off those trade war playbooks but watch for the bluster to get walked back.

While the markets might not care about the resurgence of Covid-19, an escalation of US trade tensions is something they most certainly do.

The markets may have been a bit too complacent in reacting to President Trump’s resolve after his comments last week suggesting the US could pursue a “complete decoupling from China” thinking it was all bluster.

Whatever goodwill had been priced in from the Pompeo meeting in Hawaii has basically evaporated into thin air as market dusts off the trade war playbooks once again.

E-minis are heading lower, and the USD is firming up versus AUD and CNH.

The US President’s team are split in their views on China, with Navarro and Trade Representative Robert Lighthizer much more hawkish than Treasury Secretary Mnuchin and National Economic Council Director Larry Kudlow, for example.

These comments are less shocking in the political context where the betting market gives Joe Biden an 18pp lead over President Trump in the race to become the next president, so perhaps President Trumps is looking to rally his hardcore base and the undecided voters where anti-China sentiment runs deep.

However, given the divide in the Whitehouse team, it is certainly possible that Mnuchin and Kudlow talk these hawkish tones down in the coming days. It won’t be the first time Trump’s trade bluster would have been walked back.

Watch the Yuan for an escalation

Any negative follow-through to US equities will test the market’s resolve that central-bank liquidity is all that matters. For USDCNH, it’s moving lower because of the growing China trade surplus. There is no fundamental reason for CNH depreciation from a flow perspective.

Any major upside in USDCNY and USDCNH can be viewed as a political signal from China that they may consider weaponizing the Yuan, so the Fixing is going to be critical over the next few days.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp