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Short and sharp this week as it’s Sunday but my usual time to write this piece has been truncated by my presentation at a conference in a couple of hours.
Specifically though, while we have Larry Kudlow and even Wilbur Ross intimating the Phase 1 trade deal will be signed shortly, the Chinese talking bullishly about a deal and the chance of tariff rollback, and while the press hounds chase source after source on both sides of the trade war, it seems that trade hawk Peter Navarro is mounting a rear-guard action to stop any tariff rollback at this point.
He told Yahoo explicitly on Saturday that rollbacks were not part of the October handshake agreement on the Phase 1 deal and China was suggesting things that’s weren’t agreed. That he felt the need to publicly out himself when he was clearly the source of the story to that effect earlier in the week suggests that momentum was growing in the White House to move in this direction. And he’s clearly got to President Trump as well because he said at week’s end that stories to the effect that tariffs would be lifted were incorrect.
As I tweeted Saturday morning my time before the close after President Trump’s comments and Global Times EiC Hi Xijin’s tweet, that stocks and bonds held up into the week’s end was somewhat remarkable.
Folks this is not a good twist in the otherwise positive tale on the trade truce and will remind traders of what happened in May when China seemed to overplay its hand and the whole trade deal fell apart and tariffs got ramped. Remember at that time:
The S&P lost more than 200 index points.
And US 10 year bonds rallied around 50 bps to 2% or thereabouts.
Naturally, the question is if markets are placed in a position to see these types of moves repeated.
In the first instance, the answer has to be yes. New record highs for the S&P 500, which has encouraged traders to bet against a volatility breakout in a classic pro-cyclical move which really does put the market at risk from a mini [or large] Volamageddon in the first couple of days of the week – till of course we get duelling headlines again saying it’s all good.
But of course we know that money has been flowing into equity funds again after rushing out for much of the year. That in itself is a bit of a red flag if the Navarro line gets traction.
The FT reports:
Mutual funds and exchange traded funds that invest in global equities attracted $7.5bn for the week ended Wednesday, according to EPFR Global.
The inflows help explain a surge in equity markets that led the US S&P 500 index to new highs this week and the FTSE All World back near its 2018 record. Investors responded favourably to reports that the US and China could remove some tariffs in a partial trade deal currently under discussion.
And of course, there is the non-QE injection of cash into the system from the Fed which seems to have coincided with the bull move in stocks in the past 5 weeks or so.
So, where does it leave us?
That is a very good question.
Rhetorically I still have a substantial cash balance ready to put to work in stocks on the next big pullback. That was hedged at the beginning of October with call options that I have rolled back down in terms of the delta as the convexity of the moves higher increased the delta on the option.
So I’m covered to a move higher, but at a relatively lowish delta again [as an aside, this is a method of trading equity options I was taught back in the 1990’s when I had a cash, bond and currency fund at State Super and used to sit next to the funds Equity Options guy. One of the smartest people I have ever worked with – and a great bloke to boot].
Bond wise I’ve been gagging for the move into the 2.00/2.12% region to unhedge the cover on my bonds and get a little longer. I haven’t done that yet.
The key for me is that last week’s price action for the S&P 500 (using it as the bellwether) was both troubling and encouraging. Troubling because I hate the look of those 5 candles and feel like a retest of the break and the 15 ema on the dailies – 3060 and then 3042 respectively – needs to be made and then we’ll see on the strength of the short term uptrend…but I like prices low for a retest to here. 2985/90 is support on the weeklies.
The encouraging bit is the price action at week’s end in the face of these negative trade comments. It is clear that markets have swung from not thinking a deal could happen to expecting one to happen even with these comments. But frankly, that in itself is problematic as the VIX positioning highlights.
So, in the end, I’m going to say I expect to see stock prices, and bond rates lower to kick off the week. That will impact gold and silver and risk assets like the Aussie and copper, oil too.
Then we’ll see. It’s not a great feat of analysis to say that it all depends on competing comments and stories, but unfortunately, this is Trumpland now and the old rules are less relevant in the immediate time frame of days or a week.
Longer-term it has been and will remain about the global growth outlook. Trade is a big part in that outlook and sentiment toward it. So, we watch this space.
Have a great week.
@gregorymckenna on Twitter