It seems President Trump, his social media aides, and U.S. Fed Powell did a substantial job last week in tweeting and signalling all that they could to give the computer algorithm traders enough ammunition to chase the S&P 500 market back to 2990 (close to all-time highs), a rally of 5% in one week, alone. The S&P 500 is still in the same godforsaken range of 2800-3000 as it has been since July, but making lower highs and lower lows with momentum waning. The economic data is weak with financial stress in the system, as evident in repo markets and other indicators causing the market to sell off.
Trump tweets the same four-word phrase, "talks are going well," causing the knee-jerk traders to jump back in only to get right to the top facing an anti-climax. Is the market getting tired of the same cycle again and again? Perhaps so. Other than theatrics and sensationalist claims of a "very very big" and "substantial" deal, there is zero detail in the agreement passed on Friday.
If Trump claims this to be a "substantial" deal, one where two sides met to agree to meet yet again to work out if promises made before would be kept and drafted on yet another document which could or could not be signed. I am not sure if Trump has any adjectives to use if ever an actual deal were to be signed, one wonders what a real deal would sound like. After all the fuss about the thirteenth round of U.S./China trade talks on October 9, all that came out was the U.S. has agreed to postpone an increase of tariffs from 25% to 30% on $250 billion worth of Chinese imported goods, and that China would purchase between $40 billion and $50 billion worth of U.S. agricultural products.
The hard pressing, game changing issues that Trump always beat his chest about, like Intellectual Property Theft and Technology Transfers, were not even discussed or finalized. The market cheered that tariffs were postponed, but let's not forget 25% tariffs are still in place. There is no truce and China and U.S. companies are still being penalized. We all know how many times Trump has decided to throw a random curve ball at China days after any negotiation, only to shock the market once again.
Now back to something that really matters. China released its import and export data for September on Monday. Its exports fell 3.2% vs. a year ago, compared to expectations of a 2.8% decline, and its imports fell 8.5% year over year vs. expectations of falling 6%. So, things are really not improving much, despite the market getting all excited about a deal that is not even written let alone signed. Given the indicators seen so far, it does not seem that fourth-quarter data will be any prettier from China.
Third quarter earnings reports will start in earnest this week, with the likes of JP Morgan (JPM) , Goldman Sachs (GS) , and Citigroup (C) reporting this week, which should steer the focus away from macro noise and back onto market fundamentals. Earnings are forecasted to be down 3.1% for the quarter and profit margins expected to show further weakness as higher labour market costs, tariffs and dollar costs eat into company profits.
Given the mess in the repo market at the end of September, the Fed had decided to temporarily extend the overnight repo operations through November. That is a dubious decision, given all the pundits had claimed the stress in the repo markets as a "quarter end one-off" effect. But it seems there is a dollar shortage after all.
On Friday, the Fed decided to extend these operations through at least January 2020 and said it would be buying short-term Treasury bills through Q2 2020. The T-bill purchases will be $60 billion per month, but oh no, this is not Quantitative Easing, this is just "organic growth" in the balance sheet.
Call it what you want, this announcement came before the actual October Fed FOMC meeting. Why did they feel it to be so important to announce it weeks before? Something does not feel right and it is entirely possible the Fed has lost control of the market and is really starting to worry. As the old adage goes, "when the Fed panics, the market panics more."
The dollar fell last week and all China-related miners rallied 5%-8% on hopes of a deal being agreed and growth picking up sharply. Copper has not moved at all and is still trading at below $5800/tonne, leaving the large-cap miners at risk of selling off once again as hopes fade. Brent oil tried to break $60/bbl, but given that there was no fundamental change in demand/supply, just a risk-on mood wanting to buy all asset classes higher into trade talks, it is below $60 again and oil stocks look at risk of selling down, as this quarter is expected to show a material earnings decline.
For the market to sustainably break 3000 and higher on the S&P 500, it needs new incrementally positive data showing actual earnings accretion, rather than just hopes and tweets claiming positive things. Till then, it will probably fail once again at the top end of the trading range to test the lower bound. Corporate buybacks, which have been a big support for the market, have stopped as companies are in blackout period prior to their earnings release. If the numbers are not positive, there is a risk of the market breaking below its recent support of 2850.
Focus on fundamentals and actual numbers, do not follow the machine algorithms that can change their tune at the slightest hint of a break in trend, leaving you to fend for yourselves.
