This Morning's Log Entry

Premarket:

Futures are pointing to a strong U.S. open this morning after an impressive overnight rally in China and positive earnings reports in the U.S. premarket; 9 of the 10 companies reporting exceeded earnings estimates, with the 10th meeting expectations.

Read last evening where the U.S. allegedly wants China to “shift” $50 billion worth of tariffed goods away from ag (“for political reasons”) and onto other U.S. industries; the article states that the U.S. wants to retain tariffs on $50 billion worth of Chinese imports, and, thus, expects China will insist on leaving the same on U.S. products. China continues to push for a complete elimination of tit-for-tat duties on both sides.

I’ve maintained all along that leaving tariffs as part of a deal would be a huge negative for the stock market, not to mention the economy! Question here being, does leaving just a portion alleviate the downside risk? Perhaps, but, at a minimum, it’ll ultimately hinder the upside, as it sends a signal that Washington continues to – confusedly so – view tariffs as something that doesn’t ultimately create adverse economic consequences (for the applier as well as for the applied).

Traders would be wise to short the companies/industries that the U.S. instructs (or encourages) China to pivot its tariffs toward.

Again, while equity market players may indeed feel consoled (if only temporarily) if the U.S. and China reduce their respective tariff regimes, any suggestion that the Administration plans to wage the same sort of campaign against Japan (in talks presently) and/or Europe (more critically) will continue to weigh on sentiment and eventually, and markedly, therefore, on stock prices.

Near-term seasonality, earnings setup, data (on balance), Fed stance, breadth, etc., all lean bullish. Headline risk, however, remains huge.