Stocks are sliding this morning on a familiar concern, in fact the same one that has been blamed for most red prints in recent months: rising trade war rhetoric. But if the US has it bad, it's nothing compared to the mauling that China has suffered in recent weeks: the Shanghai Composite is down from 3,559 on Jan 24 to close at just 2,859 on Monday, down almost 20% and on the verge of a bear market.

Today, SocGen's Andrew Lapthorne also points us the surprising weakness in China, with the CS300 off 3.9% last week and down 10% so far in 2018, which he notes is in stark contrast to the Russell 2000, which has been among the strongest performing indices over the last three months.

Summarizing this divergence, Lapthorne writes that "if Trump’s ‘Trade War’ is about rebalancing the prospects of US companies versus, say, China, then markets appear very much on message. The Russell has outperformed the CS300 by a remarkable 22% since the beginning of April."

What makes the divergence even more stark is that despite this weekend's emergency measures by the PBOC, in which the central bank cut RRR releasing 700bn yuen into the financial system, Chinese stocks erased earlier gains overnight to close near session lows.

Or as one Bloomberg commentator summarized, "Judging by the year-to-date equity performance of Chinese and U.S. stocks, it looks like trade wars are easy to win..."

Or maybe not, and the divergence is merely a delayed reaction as US traders process what was painfully obvious to their Chinese peers: the "global growth scare" has been unleashed (by China as Nomura explained earlier), and sooner or later it will hit the US. Indeed, as Lapthorne points out:

"regular readers will know we are not keen on the Russell 2000 as corporate leverage is high and profits are struggling. So seeing the index fly up like that must have been painful for investors who were outright short. However, such a strong performance does mean implied volatility on the Russell 2000 (RVX) has been relatively subdued versus its bigger cousins (VIX). If the ‘Trade War’ fades, then a reversal of this relationship could be on the cards."

Backing off from the Russell and focusing on the broader US market shows emerging signs of stress:

The S&P 500 has also been doing well this year but, as has been well reported, of the 3.0% gain, around 2.5% can be accounted for by just a few FAANG stocks. However such, an analysis perhaps overstates the narrowness of the US market, as for every big winner there is often a big loser as well. For example, the un-weighted average YTD performance of today’s S&P 500 constituents is +3.4% and the equal-weighted index shows a total return of 3.2% versus a weighted return of 4.0%.

Lapthorne concludes that while the FAANG performance is impressive – if concerning, especially in light of today's smackdown – S&P 500 strength is broader than often reported. That said 3.0% is hardly blockbuster, but it is certainly enough to win the market "trade war" with China, where one more down day and the Shanghai Composite will enter a bear market.