As Friday progressed, Steve Mnuchin's "constructive" assessment of the talks was yet another attempt to fool the algos one more time to chase the market into the close as futures closed up on the day with hope that a deal would still be reached. Wishful thinking. One can forgive the algos ("machines") for being duped, as clearly they have no cerebral tendencies nor any perceptive skills whatsoever to read between the lines.
One wonders if humans can be ruled out altogether when it comes to investing and trading -- there is still room for active management! It just takes a bit more time, patience and capital, as regrettably so much capital lies in the hands of these algos that chase trends, exacerbating the moves in either direction. However, if we (humans) get it right, the unwind can work out to be even more lucrative.
The talks ended with no agreement. Trump decided to hit the media with claims that it was "China who broke the deal," with further totally unfounded sensationalist comments that "we are happy collecting tens of billions of dollars from China," when clearly the man has no concept of economics or how trade tariffs even work. And this is the President negotiating, ouch.
Trump's own economic adviser, Larry Kudlow, rejected Trump's narrative, saying that U.S. companies and U.S. consumers would end up paying the tariffs, as the companies would pass on the higher prices. So, thank you Trump for Making America Great Again! He even echoed a plan to redirect the money collected from tariffs and redistribute to the starving people in the world -- another nonsensical idea that was later criticized.
The S&P 500 is down only 3% since the highs reached in April, with the Nasdaq down 3.3% and Philadelphia Semiconductor Index down 6%. After a few more angry Trump tweets over the weekend, the Chinese State-owned Global Times reported "the fierce U.S. offensive" as irrational and hurtful to the U.S. economy.
It is yet unclear how China will respond. As the market awaits this, what they fail to see is how the yuan is weakening even more, down nearly 1% today at 6.90 vs. the dollar. Anyone remember the key 7.0 vs. the dollar psychological level that can cause widespread contagion recession worries?
China is very silently devaluing its currency in the background, which will make the tariffs meaningless to Chinese as they offset the increases in tariffs. This will further anger Trump, who cannot bear to see China not "giving in" to his demands. And why should they? China is not afraid to fight and will never stand anyone dictating their domestic policy.
No further talks are scheduled, but Trump and Xi Jinping will probably meet during the G-20 meeting in Japan towards end of June. A lot of carnage can happen to the markets over that timeframe. Most FOMO (fear of missing out) investors who got sucked into the market in April after missing out on the first-quarter rally are still holding on as they "hope" for a deal -- blissfully oblivious.
The backdrop is simple. Global growth has been slowing. With the market at its highs, the Fed will continue its patient stance. We know their trigger point is around 2400 on the S&P 500. Trump has one agenda: get the market higher by 2020 and get re-elected. The only way to do that is to show to the American people how he got them out of a recession and stood up to China. Yes, the public is that naive.
There is no way the U.S. and China will reach a deal, at least not with the current conditions of the U.S. The only way we can get higher earnings and markets is if monetary policy is even looser, i.e. the Fed cuts rates and re-levers the system with even more debt. For that, the market needs to fall. Trump does not mind as he has more than a year to get the job done.
The data will continue to deteriorate. The dollar will continue to rally, hurting asset prices -- including the U.S. markets. Eventually weak longs will give up and be forced to sell their holdings, getting the market to panic even more as in December 2018. Only then will the Fed come in with its cavalry to save the market.
With no trade deal in sight, a worse off global environment ahead of us, tighter monetary policy (for now), lower Q2 guidance post conference calls and higher costs to be endured by U.S. companies and consumers, this all smells of stagflation. Core inflation will start creeping up at a time when growth is slowing. Only the Fed will not be able to raise rates. That is the worst possible combination for asset classes and cyclical equities.
Commodities like copper and base metals will continue to dwindle to levels where price is so low that supply cannot keep up with demand, or where they need to be incentivized to produce. Copper could break below $6000/tonne, as well. Mining stocks are already down 10%-15%, but they can fall even more if recession ensues.
South Korea chip exports fell 31.8% for May 1 through May 10 from a year ago. Combined with Kospi Index at its December lows, which usually is a gauge for health of the global economy, it does not bode well for equities in general. Tech companies like Apple (AAPL) and Ali Baba (BABA) with severe exposure to Chinese growth and revenue will get hit even further. It is a good thing that Apple is up 46% since its January profit warning and lowered guidance!
Buy the dip mentality is still firmly rooted in the market's mindset. It only works, until it does not. After all, the only reason why the U.S. and Chinese markets rallied in Q1 was on the back of the Fed caving in, the Chinese injecting trillions in liquidity into the system, and Trump's one line "talks are going very very well" teasers. But now what?