An increase in tariffs on Chinese goods was well anticipated by the market and is having little impact as they go into effect Friday morning. Some market players were hoping for a last-minute reprieve but that was not a reasonable expectation.
The issue now is whether negotiations continue or if they are cut off completely. As long as there is a dialog between China and U.S. the market is likely to hold up. However, if the negotiations complete blow up -- which is unlikely -- it is going to be ugly.
President Trump surprised the market last weekend when he tweeted about increasing tariffs after a number of assurances that a deal was about to be made. For the past week the market has been trying to discount the news, although it has been difficult because it isn't clear whether there still is a path to an eventual deal.
The tariffs were enacted Friday morning as anticipated and now the Chinese will invoke their counter-measures. We already knew, with a high degree of certainty, this was going to happen. The question now is whether the current, ongoing, negotiations will be productive and lead to further discussions. We should see some hints later in the day and I expect that there will be a positive spin, which is why the indices are trading near flat this morning.
In addition to China trade, we are going to hear endlessly about the Uber (UBER) IPO. What is most interesting is that the pricing at $45 was not nearly as aggressive as what the underwriters did with Lyft (LYFT) , but this is a massive offering and it is going to take some liquidity away from other parts of the market.
Market players will be intently focused on the IPO price. Morgan Stanley took some heat for not better supporting the Lyft IPO so it will be a test for the underwriters. If Uber breaches that IPO price it is going to have an impact on the broader market.
In the early going the market feels uncertain. On the one hand the worst of the China trade drama may be priced in if the negotiations are ongoing. On the other hand, the recent price action has hurt the charts and there is more risk to the downside.
Even if the indices do hold here, and the China trade deal doesn't result in more worry and concern, what is the upside catalyst? What is going to bring buyers back into this market and help produce some positive momentum?
The first thing that will put the market back on track is to stop going down on news headlines. Once that happens there will be some short-covering and then maybe some bargain hunters. The longer the indices can hold support the more likely the buyers will inch back in.
I'm positioned with a high level of cash and will be looking for an upside trade in the indices and some good entry points in individual stocks. There is no reason to be an aggressive buyer right now but there is reason to look for some support to occur. The risk of positive news over the weekend is probably higher than negative news.