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

With Trump making it clear on Sunday night that he was looking 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 stock futures 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.”

There was just one problem: none of this actually happened... at 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.

However, despite China's denial, S&P 500 futures reversed losses after Trump’s comments, and soared over 60 points from session lows.

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.”

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.