You thought China would roll over and play nice to Trump just so the tariffs wouldn't be raised again. No, they want more to give in to Trump's demands for ag purchases. The Chinese have time on their side. They know the 2020 election is only a year away, and Trump wants to please the stock market with a trade deal even if its a nothingburger to have a "win" before the elections come up. Xi has all the leverage in this negotiation. And he knows it. That is why after Trump hyped up the "phase 1" part of the deal, the Chinese wouldn't follow, and left room to ask for more before the deal is written and signed. And they will want more. Because if both sides walk away, the stock market will go down, and Trump suffers more than Xi if that happens. Xi could care less about the Chinese stock market, its viewed as a casino anyway in China, so if he torpedoes the US stock market and drags the Chinese stock market with it, at least he guarantees a Democrat win in 2020, then all the better. Short term pain, long term gain.
Xi will push Trump to the limit, to get the most out of a deal while giving up the least. They know that the political tides are changing in America, and China is now viewed negatively by both the Republicans and Democrats. So a free trade bonanza with no tariffs is probably no longer a realistic target for China. They just want to minimize the tariffs as much as possible without giving in on IP theft, forced joint ventures, and other industrial policies that are completely one sided in their favor.
One of the most overlooked factors about this US/China trade negotiation is that it won't lead to a deal that has any staying power. And a temporary deal is about as bad as no deal. Because on November 2020, there will have to be another US/China trade deal, which would basically make the previous deal meaningless, no matter who wins in 2020. And no one who is actually sane in corporate America is going to make long term decisions based on any trade deals over the next 12 months anyway. Because if Trump gets re-elected, he will likely break the deal and try to get a better one, and if a Democrat gets elected (probably Warren), then they will scrap whatever Trump did to get the kind of trade deal that they want.
The market right now is under the illusion that a US/China trade deal will be very small, and not change much. Yet they think a substantial US/China trade deal would be a game changer. The reality is that because of the 2020 election, any trade deal will be meaningless. So there won't be any "positive" outcome from the trade negotiations. Which is probably why the best possible scenario for the stock market would be for Trump to milk this US/China trade negotiation for several months, keeping the carrot in front of the donkey that is the stock market investor for as long as possible, without actually giving the carrot. Because once the donkey eats the carrot, there is nothing else positive to look forward to, and ends up making the donkey feel worse afterwards.
That is why it is actually a positive for the stock market that Trump drags this negotiation out as long as possible, going with the phase 1, and hinting at phase 2 and phase 3. He is playing the long con on the stock market investor, giving just enough hope for them to keep stock prices elevated, but not enough hope so that the Fed feels comfortable not cutting rates.
But the uncertainty of the 2020 election and a >50% chance of a Warren win will be too much for fund managers to stay invested and they will sell fast and furious, especially if SPX breaks 2800.
We got the relief rally on the verbal agreement to a small trade deal on Thursday and Friday, but its only gone up back to levels pre ISM. There is a distinct lack of rocket fuel provided by the persistent down trend in interest rates that you saw from January to July. Without that lower and lower rates rocket fuel, the stock market can't go up much. The earnings growth is just not there, and there is just not enough dumb money in the whole world at this time to keep the SPX above 3000 for long. The failed IPO of WeWork is a sign that at this stage of the business cycle, the dumb money is not going to play that hot potato game. They've been burned enough by the debacle that was 2018.
It looks like the volatility will continue to dissipate as earnings season rolls on, and we get closer to the return of stock buybacks. With the trade deal event sort of out of the way for the next few weeks, the weak hands will slowly come back in to stocks, but they won't be aggressive, so don't expect any big surges higher. At the same time, a lot of weak hands were taken out in August, and some more the last 2 weeks, so the market should be safe to trade in a tightening range, perhaps 2920 to 3020.
Posts
No comments:
Post a Comment