China continued its strong rally overnight while U.S. equities remain in apparent consolidation mode below 2800 on the S&P 500 and above its 200-day moving average.
U.S. equities not sliding lower (yet) from what has been strong resistance since last fall speaks to the prospects for a China trade deal announcement. That said, equities not rising through 2800 resistance speaks mostly to the uncertainty over the ultimate details of a deal. The market is not fretting over IP theft and/or forced technology transfer: Right here it’s all about tariffs, and to what extent they’ll be rolled back, as opposed to simply the promise of no further escalation. It’s also about legitimate concerns over how the White House will approach the rest of the world post-China trade agreement. Trump’s surprise, and grossly ill-timed, decision this week to hit India and Turkey with revocation of existing favorable trade agreements is in no way a confidence-inspiring move for markets. While I suspect he sees it as yet another subtle punch at China, showing he’s willing to walk, it is utterly unnecessary and reduces the odds of getting what he seems anxious to get immediately upon the signing of a deal; a burst higher in stocks…
I look for some serious positive trade jawboning out of Washington any time now; the market’s reaction will be telling in terms of credibility. Again, the threat of hitting other trading partners at this juncture could notably mute any positive market reaction.
Brexit negotiations breaking down in Brussels this week of course isn’t helping either; another scenario that speaks to the importance of fluid cross-border trade the world over.
Broadly speaking: Economic data on balance spell low near-term recession (bear market) risk, market breadth is extremely bullish and the Fed is in no mood to tighten. I.e., while there’s presently huge headline risk to contend with, the general setup at this juncture is in place to see the market through resistance and toward September’s highs. Whether or not it gets there – and whether or not this bullish setup holds up -- depends heavily on the U.S.’s approach to global trade in the weeks to come…
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