We have reached the "hallucination" phase of the trade war.

With Trump making it clear on Sunday night that he was staring at the plunging US equity futures in sheer horror, tweeting that "my stock market gains must be judged from the day after the Election, November 9, 2016, where the Market went up big after the win, and because of the win", the US president appears to have reached desperation point to keep US stocks higher early on Monday at the G7 meeting in France, and the result was that just before 3am ET Trump - having decided to say anything to push futures higher, told reporters that the Chinese government called his team in Washington Sunday not once but twice, in a bid to restart talks on trade.

“China called last night our trade people and said let’s get back to the table,” Trump said on the sidelines of the Group of 7 meeting in Biarritz, France. “They understand how life works.”

According to Trump, U.S. officials received two “very productive” calls from the Chinese but declined to say whether he’d spoken directly to Xi. “They want to make a deal,” he said, adding that the U.S. would accept the Chinese invitation and return to the negotiations.

“We’re going to start very shortly and negotiate and see what happens but I think we’re going to make a deal.”

“China called last night our top trade people and said let’s get back to the table.”



Trump says China wants to restart trade talks during a meeting with Egypt’s President #G7Summit pic.twitter.com/VWHjo4H1nA — Bloomberg TicToc (@tictoc) August 26, 2019



There was just one problem: none of this actually happened least according to China.

Asked by reporters about Trump’s remarks shortly after the American president spoke, Geng Shuang, a spokesman for the Foreign Ministry in Beijing, said that he wasn’t aware of any weekend U.S.-China phone calls. He repeated China’s position that the trade war should be settled through negotiation, adding that China resolutely opposes to new US tariffs, and noting that US tariffs violates the accord struck between leaders in Osaka.

Then, just before 6am, China's Global Times editor in chief Hu Xijin confirmed that "based on what he knows", there were no phone calls between the US and China in recent days, suggesting that Trump indeed "hallucinated" the 2 phone calls, which only took place in his head in hopes of keeping stocks from plunging.

Based on what I know, Chinese and US top negotiators didn't hold phone talks in recent days. The two sides have been keeping contact at technical level, it doesn't have significance that President Trump suggested. China didn't change its position. China won't cave to US pressure. — Hu Xijin 胡锡进 (@HuXijin_GT) August 26, 2019

Sure enough, despite China's consecutive denials of Trump's story, S&P 500 futures reversed losses after Trump’s comments, and soared over 60 points from session lows.

Adding an additional boost to the futures ramp was a comment made by Trump just after 530am ET that "the U.S. is in a much better position now than ever for a deal with China", although how that is even remotely true at a time when both sides just ramped up tariffs on each other is absolutely bizarre.

And just to really confuse everyone, when asked if he could delay the planned tariffs on China, Trump said "anything is possible", denying the White House denial from Sunday, according to which Trump was having second thoughts about not having hiked tariffs on China sooner.

In short, a total mess as Trump now grapples tick by tick to literally fabricate a narrative that keeps stocks from plunging as he is convinced a market crash would kill his reelection chances/

* * *

Was Trump "confused? It is possible: earlier in the session, the futures plunge was halted after China’s top trade negotiator, Vice Premier Liu He, had used an appearance in China to call for a de-escalation in tensions.

“We are willing to solve the problem through consultation and cooperation with a calm attitude,” Liu said at the opening ceremony of 2019 Smart China Expo in Chongqing, Caixin reported on Monday. “We firmly oppose the escalation of the trade war,” he said, adding that it “is not conducive to China, the U.S. and the interests of people all over the world.”

China welcomes all foreign investors, including those from the U.S., Liu said, adding that policy makers will keep building a favorable environment and protecting property rights. He stressed that China has ample macro-policy tools to ensure the country’s economic fundamentals have “good momentum.”

And while Liu’s comments and a slightly stronger-than-anticipated yuan fixing suggested that traders don’t need to worry about an immediate counterpunch from China after a tumultuous weekend, it was clear that Beijing has no intention of losing face by being the first to make a phone call to Trump in hopes of ending the escalation, and yet that's precisely how Trump made the situation appear.

Meanwhile, communication failure, disagreement or outright lies aside, the trade war continues to escalate, over the weekend China said it would follow through with retaliatory measures against Trump's "barbaric" tariffs and fight the trade war to the end, after the U.S. failed to keep its promises, the Communist Party flagship newspaper People’s Daily wrote in a Saturday editorial. Later, the Editor-in-Chief of the nationalist Global Times, Hu Xijin, said on Twitter that the U.S. is “starting to lose China.”

China has 'lost' the US already: all-round high tariffs, Huawei ban, political hostility, Hong Kong, Taiwan... We're facing a completely different United States. We have nothing more to lose, while the US is just starting to lose China. — Hu Xijin 胡锡进 (@HuXijin_GT) August 24, 2019

Taoran Notes, a blog run by the state Economic Daily, said Monday that Liu’s remarks showed that China is not being “taken hostage by emotions.” At the same time, the blog said that this stance didn’t preclude fighting back.

“If someone continues to misread China’s rational and calm attitude, and holds the illusion that they can continue maximum pressure and China won’t fight back, then China has no other option but to retaliate as in the past.”

Yet in the most bizarre outcome of this weekend's events, having heard Trump's inaccurate soundbite, algos are convinced that trade war is easing and have sent futures surging. We expect this sharp move higher to reverse shortly as human traders reach their desks and the reality that one or more actors are now outright lying is fully appreciated.