Friday, February 22, 2019

This Morning's Log Entry and This Week's Message: Europe's Trade Negotiation Strategy, If....

A consensus seems to be growing that since a trade deal with China is a virtual certainty, it’s already in the market. If that’s the case, we should anticipate a sell-on-the-news scenario.

I’m not in that camp just yet. The wishy-washiness of the situation thus far has left enough uncertainty alive that I believe there exists sufficient hesitation (fear of losing), at this point, to thrust the market higher (turning to the fear of losing out) if a deal happens relatively soon. I do, however, agree that the longer the market melts up without an inked deal the more likely this growing consensus has it right.

Beyond China, Europe trade relations can morph into yet another huge headwind. This morning the EU announced that it will immediately target Caterpillar if Trump signs on to tariffs on European cars. The cold welcome Pence and company received at the Munich Security Conference last weekend speaks to the EU’s present strategy: Clearly they’re betting that the Q4 swoon in stocks, and the now on balance weakening U.S. data weakens Trump’s position to the point where the threat of swift retaliation will stay his, in their view, now shaky hand.

Bottom line: A US/EU trade war, akin to the China experience, would be messy, to say the very least. The question we’ll be pounding on here is will general conditions hold up in the process

Current conditions are presenting low recession odds for the foreseeable future. A trade deal with China, and a quick, calm, friendly resolution to whatever issues exist with Europe will have us very bullish on the balance of 2019: Sentiment will improve markedly, the data will follow, and we’ll be talking about a Fed rate hike in Q4 (which will be a very good thing -- although the market won't like it initially -- as it’ll be justified and it’ll give the Fed more breathing room to act when the inevitable next recession comes)… 

A trade war with Europe, on the other hand, will have us very much on guard, looking for conditions to roll over, and acting accordingly if/when they do...

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