- Markets continue trying to wade through unclear U.S. trade strategy on China
- Yale academic asserts Phase I is flawed and hollow
- Strategists warn of sector rotation from growth to value
- Bitcoin drops to a six-month low
If investors continue to trust current political trade-speak, however vague or convoluted, as they clearly did on Friday, stocks are likely to move higher this coming week. All four major U.S. indices, the S&P 500, Dow, NASDAQ and Russell 2000 each ticked up to close the week.
As well, U.S. President Donald Trump’s recent suggestion that he might veto legislation passed by Congress in support of the Hong Kong protestors, would increase the likelihood of a signature on at least a partial trade deal. Such a compromise, to foster trade negotiations, reinforces a report by the South China Morning Post that Washington will likely postpone new tariffs scheduled for December even if there’s no deal by that time.
Trump may have indicated that a deal was “very close,” which is of course promising. However, markets have been hearing some version of this for a long time; critically, in almost the same breath the president also warned that China wants the deal more than he does, rather a bellicose thing to say. Furthermore, Trump boasted the he saved Hong Kong by warning Beijing on trade.
Will the central government of the People’s Republic of China take kindly to Trump's contentious rhetoric? More significantly, will Chinese Vice Premier Lue rescind an invitation to U.S. trade representative Robert Lighthizer to come to Beijing for further talks later this month if Trump goes ahead and signs the bill supporting Hong Kong protestors?
Though we of course don't have the answers, we have repeatedly pointed out that even if the Phase I portion of a deal is signed, that doesn't necessarily suggest a complete deal will be inked anytime soon. The two largest global economies—both biggest trading partners, as well as each other's biggest trade opponents—are no closer to settling the same contentious issues that have been plaguing their path to a deal from the start.
To that effect, Stephen Roach of Yale University’s Jackson Institute says the “phase one” deal is “hollow,” “flawed” and “ridiculous.” As such, it's simply a political 'band-aid' with which to assuage the wound made by Trump's ongoing trade tiff, a way to provide a temporary patch to help the president’s bid for reelection.
First Weekly Decline After A String Of Rallies
Though U.S. equity indices were up on Friday, it was the first weekly decline after a string of weekly rallies.
The S&P 500 edged higher on Friday, (+0.22%). Financials outperformed, (+0.74%), perhaps because yields rebounded on Thursday and hung on to those gains on Friday. Trade-sensitive carmakers were among Friday’s leaders, propelling Consumer Discretionary shares higher, (+0.69%); Industrials followed, (+0.52%). Technology stocks, which normally correlate with the outlook on trade, fell (-0.13%). Clearly, investors avoided the sector, favoring value stocks such as banks, which provide a high cash return and stand to appreciate as investors rotate away from growth and into value.
After gaining for six straight weeks, rising 5.71% in total, the SPX fell 0.33% last week. Materials underperformed, (-1.71%), demonstrating that over the longer term, the market is skeptical there will be progress on trade. The price penetrated over 2.00% above the top of the broadening formation since January 2016, satisfying the moderate filter to avoid a bull trap.
Yields on the 10-year U.S. Treasury note continue to struggle at the nexus of the short-term rising channel since the September bottom and the long-term downtrend line since the November 2018 peak. Technically, the 50 WMA recently crossed below the 200 WMA, providing a death cross that is more potent by virtue of the 200 DMA pointing down as well.
Yields have been trapped at these levels since early September, as the market is waiting for a trade resolution...one way or another. At the same time, the weekly, potent death cross suggests a downside beak.
Similarly, the yen has been strengthening against the dollar. This occurred even as the dollar itself, last week, also strengthened.
What's less clear is the path for gold. In the medium-term it’s pointing down, but it might be developing a falling wedge, bullish in the uptrend since the commodity's mid-August 2018 bottom.
Bitcoin tumbled to a six-month low after China announced another crackdown on cryptocurrency trading. Technically, the supply-demand balance was headed lower after completing a descending triangle. However, we’d discourage shorting the most popular digital currency by market cap right now. It's due for a rebound, having reached the bottom of its falling channel.
Positive trade rhetoric failed to boost oil prices, even after the bullish U.S. Energy Information Administration (EIA) weekly inventories report and a jump in expectations that OPEC and its allies would extend their production cut program.
The price on Friday trimmed half of Thursday’s gains, which reached the highest level since Sept. 23. Perhaps there was little interested demand after oil reached the top of its rising channel since the early October bottom. However, the price did find support above the 200 DMA.
Week Ahead
All times listed are EST
Tuesday
10:00: U.S. – New Home Sales: expected to rise to 709K from 701K for the month of October.
Wednesday
8:30: U.S. – Core Durable Goods Orders: seen to jump to 0.2% from -0.4% previously.
8:30: U.S. – GDP: forecast to remain steady at 1.9% for the third quarter.
10:00: U.S. – Pending Home Sales: probably dropped to 0.9% from 1.5%.
10:30: U.S. – Crude Oil Inventories: expected to have climbed to 1.543M from 1.379M the previous week.
Thursday
All Day: U.S. – Thanksgiving Holiday: markets closed
Friday
3:55: Germany – Unemployment Change: forecast to decline to 5K from 6K.
5:00: Eurozone – CPI: expected to advance to 0.9% from 0.7% YoY.
8:30: Canada – GDP: expected to remain at 1.0% MoM.
20:00: China – Manufacturing PMI: expected to edge higher to 49.5 from 49.3, still in contraction territory.