U.S. equity futures and Asian stocks rallied notably last night on news that the U.S. and China are drafting a multi-point plan to end the trade war. That rally, however, completely reversed on followup news suggesting there remains a marked lack of detail. News that China is banning Australian coal imports seemed to shake global markets a bit as well.
The latter definitely throws a tiny wrench into my near-term global thesis. I had the Aussie rallying on a trade deal and what looks to be aggressive China stimulus going forward. Clearly, this is China retaliating against Australia’s recently announced Huawei ban. The action on China’s part further illustrates its willingness to leverage trade as a retaliatory tool; has to touch a nerve for traders who are aggressively betting on a US/China trade deal.
U.S. equities took another leg lower this morning on a surprise decline in capital goods orders for December, which speaks to trade war pressures on business investment. Also concerning was this morning's Philly Fed Business Outlook Survey, which came in at a shocking -4.1, against expectations of +14.0, and a prior month reading of +17.0. Bucking this morning’s negative data trend is the Flash Composite PMI for February, scoring 55.8 against expectations of 54.4 and a prior month reading of 54.5. However, in the details there was reporting of a “soft spot” in client demand due to global slowing.
Bottom line: While the U.S. remains in decent shape, global trade uncertainty is definitely beginning to take its toll. A pause here in the rally sets an even firmer stage for a spike higher on a trade deal. The weaker data – as long as odds remain tilted in favor of continued expansion – is net bullish for equities as it signals to traders that the Fed will stay out of the way for the time being.