The Rhyme: Tariff Truce Lifts Markets Before Xi Summit & Its 2018 Echo

"History doesn't repeat… but it rhymes." — Mark Twain

◉ THE PRESENT

S&P futures are up half a percent this morning, and the reason spent the weekend in a conference room at JP Morgan's Manhattan headquarters. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer sat down with Chinese Vice Premier He Lifeng on Saturday to hash out tariff renewals, rare-earth minerals, and AI guardrails before President Xi Jinping arrives at the White House on Thursday. Markets smell a deal, or at least a delay. The Trump administration already postponed its next round of Section 301 excess-capacity tariffs to keep the negotiating table clean, and the existing tariff truce doesn't expire until November 10 — which gives both sides just enough room to announce progress without committing to anything permanent.

The last time a president paused tariffs to clear the way for a summit, the rally lasted exactly one trading session. Then the Fed showed up.

◉ THE ECHO — AUGUST 25, 1987

The Dinner That Bought Twenty-Four Hours.

The G20 summit in Buenos Aires was winding down on a Saturday evening when Donald Trump and Xi Jinping sat across from each other at a private dinner with their trade teams flanking the table. Steve Mnuchin and Robert Lighthizer on the American side, Liu He on the Chinese side, and between them the wreckage of an eight-month trade war that had already put 10 percent tariffs on $200 billion of Chinese goods, with a planned jump to 25 percent set for New Year's Day. The S&P 500 had dropped about 6 percent from its September peak of 2,940, and every trading desk in New York was watching a phone screen in Buenos Aires for any signal of a ceasefire.

The dinner lasted two and a half hours. When it ended, both sides announced a 90-day truce. The January 1 tariff increase was off the table. China would start buying American agricultural products immediately. Fentanyl would be designated a controlled substance. The headlines all used the same word markets are hearing again this morning: truce.

Monday came. The S&P 500 gapped up at the open and closed at 2,790, up 1.09 percent from Friday's 2,760. Larry Kudlow told reporters on a conference call that progress was real, even as he stopped short of calling it a deal. Cable news ran the chyron "Trade War Over?" in bold letters. For about fourteen hours, it felt like the fever had broken.

It hadn't. That same Monday, the three-year and five-year Treasury yields quietly inverted for the first time since 2007 — the bond market's way of saying the economy was slowing regardless of what two men agreed to over dinner in Argentina. By Tuesday morning the confusion was everywhere. Peter Navarro, Trump's trade adviser, gave an interview that contradicted Kudlow's optimism. Traders couldn't tell what had actually been agreed to. The S&P dropped 3.24 percent on December 4, its worst single-day loss since October 10, and it kept falling. On December 19, Jay Powell hiked rates another 25 basis points to 2.25-2.50 percent — the fourth hike that year, the ninth since the cycle began — and used the phrase "some further gradual increases" that made the market decide the Fed was sleepwalking into a wall. Five days later, on Christmas Eve, the S&P closed at 2,351. Down 20 percent from its September high. The floor traders still working that shortened session described the closing bell as a funeral.

The Buenos Aires truce didn't fail because it was fake. It failed because it solved the wrong problem. Markets weren't scared of tariffs alone. They were scared of tariffs plus rate hikes plus slowing growth, and a Saturday dinner couldn't fix all three.

◉ THE RHYME — WHAT'S IDENTICAL

Both rallies are built on the same foundation: the hope that postponing a tariff war is the same thing as ending one. In 2018, it wasn't.

◉ THE DIVERGENCE — WHAT'S DIFFERENT THIS TIME

Oil is the uninvited guest. In December 2018, crude was collapsing — WTI fell from $76 in October to $42 by Christmas, which actually cushioned consumers even as trade fears mounted. Today oil is doing the opposite. WTI has been above $80 since mid-August, briefly touching $106.75 last week on Gulf supply fears. A trade truce doesn't lower the price of a barrel. If anything, smoother relations with Beijing could mean China buys more crude, tightening the global market further.
The Fed already pulled the trigger. In December 2018, the rate hike that crushed the Buenos Aires rally came 18 days later on December 19. This time Warsh's Fed hiked five days ago, on September 16. The damage is already in the bond market, with the 10-year yield at 4.98 percent. The question isn't whether the Fed will hike — it did. The question is whether it hikes again, and the dot plot pencils in one more this year.
This summit has an Iran problem the last one didn't. The Bessent-He talks reportedly included pressure on Beijing to cut its purchases of Iranian oil — a demand that didn't exist in 2018. It makes the trade negotiation harder because it ties tariff relief to a geopolitical concession China has consistently refused to make. Every barrel Beijing doesn't buy from Tehran is a barrel it needs to find somewhere else, at a higher price.
Markets are higher, not lower. The S&P was already down about 6 percent from its peak when Buenos Aires happened. Today the index closed Friday at 7,650, within striking distance of its highs, and the VIX is sitting at 14.81 — almost bored. That means there's more room to fall if the summit disappoints and less panic fuel to drive a snap-back if it delivers.

◉ THE RECKONING — WHAT HAPPENS NEXT

Here is what happened after the dinner.

The one-day rally on December 3 gave back everything on December 4 and kept falling. The yield curve inversion spooked institutions. Conflicting statements from inside the White House — Kudlow saying one thing, Navarro saying another — made it impossible for anyone to price the deal with confidence. Then the Fed hiked on December 19, and Powell's press conference, where he described the balance-sheet runoff as being on "autopilot," landed like a match in a room full of gasoline. The S&P lost 16 percent between the Buenos Aires dinner and Christmas Eve.

Then something shifted. On January 4, 2019, Jerome Powell stood alongside Janet Yellen and Ben Bernanke at the American Economic Association's annual meeting in Atlanta and said one word that mattered more than anything that happened in Argentina: patient. The Fed would be patient. It would be flexible. The rate-hike cycle was over. The Christmas Eve low proved to be the bottom. Over the next four months the S&P climbed roughly 16 percent, clawing back nearly everything.

The trade deal? It took another full year. Trump raised tariffs to 25 percent in May 2019 anyway, despite the truce. The Phase 1 agreement wasn't signed until January 2020. China fell far short of its purchase commitments, reaching only 57 percent of the target by the end of 2021.

The lesson is simple. The Buenos Aires truce didn't save markets. The Fed pivot did. The summit bought time, but time was worthless without cheaper money. This week's question is whether the same arithmetic holds. Warsh's Fed just hiked into an oil shock the same way Powell hiked into a trade war. If the Xi summit produces a headline — a truce extension, a rare-earth deal, a purchase framework — expect a pop. The Buenos Aires pop lasted one session. Maybe this one lasts two or three because the VIX is lower and positioning is lighter. But the longer pattern says to watch the Fed, not the summit. The smart money in December 2018 used the truce rally to reduce risk, sat through three weeks of pain, and then loaded up the moment the Fed changed its mind. The trade deal was decoration. The rate decision was the trade.

In December 2018, the Buenos Aires summit rally lasted one session. The S&P lost 16% over the next three weeks — then gained 16% in four months after the Fed pivoted on January 4. The deal didn't save markets. The Fed did. Watch Warsh, not Xi.

◉ TOMORROW’S WATCH

Watch for conflicting readouts from the Bessent-He Lifeng weekend talks. After Buenos Aires, Larry Kudlow and Peter Navarro gave opposite descriptions of what was agreed, and the S&P gave back the entire rally the next morning. If Treasury and USTR release different summaries of what happened at JP Morgan on Saturday, the December 4, 2018 script starts playing before Xi even boards his plane.

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