For the umpteenth time, high-level trade delegations from the U.S. and China are to meet this week to go through yet another round of trade negotiations in order to come to a truce or deal of some sort. Despite President Trump's blatantly oblivious tweets suggesting "a deal is close, very close" or "it will be big, so big," the market is starting to lose patience as he has cried wolf way too many times for anyone to take him seriously -- other than algorithms, of course. So what can we really expect this week?
Trump comments going into this week's trade talks have suggested the possibility of making a deal only "if it is 100% good for us, or else we are not going to make it." But Vice Premier Liu He, who is leading the high-level trade delegation talks from China said, "he would bring an offer to Washington that won't include commitments on reforming Chinese Industrial Policy or government subsidies that have been the target of long-standing U.S. complaint."
It seems both sides are meeting to make a deal, but do not yet want to meet eye to eye on the main issues. After the start of October's wobble, the S&P 500 failed to break above 3000 yet again, falling back down to 2850, the low end of the trading range, only to bounce into this week's expected announcements. The market is tired and quite bored -- and has been stuck in a range for the past few months.
There is overlying weakness in macroeconomic growth globally and earnings slowdown due to labour market cost pressures and trade tariffs eating into company earnings. This weakness is offset by hopes of the Fed bailing us out, once again, and/or a trade deal announcement between the U.S. and China. Something has got to give as stocks are not trading on fundamentals, they are trading on fear and hope.
The U.S. can play tough all it wants, as its precious economy and stock market has outperformed most Emerging Markets, but that does not mean its economy is not on the verge of being contaminated by this global virus. Neither Trump nor any administration can or will ever be able to break or coerce China to give in to its demands; they are just too big and important now. China can see the fun and games taking place from across the globe, ranging from Trump's potential impeachment inquiry to the polls going into the re-election campaign. The window of opportunity for Trump to "claim a victory" is getting narrower and China knows it. In fact, one can argue the ball really is in China's hands as of now, because of how badly Trump needs a win, even if it is a fake win.
There is no doubt China's economy is in trouble, as seen by the recent slowdown in PMIs and Industrial Production etc. But they can afford to wait it out, given how well controlled their economy is. There is a serious risk of higher consumer price inflation given the recent surge in pork prices after pig Ebola breakout, as this is a staple for the majority of the population in China. Other than make a commitment to buy more U.S. agricultural and energy products, I'm not sure what else they will commit to for now. The U.S. can play hard ball and deny this or raise even more tariffs to squeeze them out, but that would mean an outright global economic war. Needless to say, Trump's precious S&P 500 will crash and burn.
Perhaps this is the end-game Trump is actually going for. At the risk of giving Trump and his intellect too much credit, he may well be playing both the Chinese and the U.S. Fed, the latter being the pawn of course. The Fed deliberates at the end of October to decide on their interest rate policy and possibly starting another round of quantitative easing. But it seems this can only be possible if the S&P 500 were to be 10%-15% lower or in some serious trouble to justify it.
Maybe it is Trump's angle to squeeze the Chinese, rock the world market, cause a mini collapse, to serve on a silver platter the justification to ease to the U.S. Fed. Once that is done, he can then walk his way back to the Chinese and call off these silly trade wars and get the market to break to new all-time highs. After all, does the American public actually care to see the true state of the U.S. economy? They are just misled by sensationalist claims and slogans, living in the deluded world of having the best president ever.
It seems the risk/reward on the markets is to the downside in the near term, but eventual upside in the medium term, unless the system really is broken and even the Fed's QE cannot save the world. Be careful what you wish for, as once the boat is rocked, it may be hard to get it back up immediately.