The long awaited G-20 Summit held in Argentina came and went. It was a bit of a foregone conclusion, as President Trump and President Jinping decided to have a time out on new trade tariffs for 90 days to "allow" room for talks. Trump agreed not to boost tariffs on $200 billion worth of goods from 10% to 25% on January 1 -- happy days!
In exchange, China will buy a "very substantial" amount of agricultural and energy products. For sake of clarity, Chinese crude imports from the U.S. (about 22% of total U.S. crude imports at around 2.3 million barrels per day) dropped to a whopping 0 in August and September, as they were replaced with West African and Iranian oil. So, could this return to the average be deemed "substantial" enough? The devil is in the detail and has yet to be released. Other than media publicity and some great family photos, nothing was really resolved.
To make it clear, this was not a suspension of the trade war, it was just a suspension in the escalation of it. During the 90-day period, the two sides have to come to an agreement on Intellectual Property rights, an open and fair market economy, and other serious matters on which the two do not see eye to eye.
As knee-jerk reactions go, overnight, the market has responded as it would be expected to. Chinese markets are up 3%, U.S. S&P futures are up 2% back to 2800 level. Copper is back at 6300, with the yuan rallying to 6.90 level per U.S. dollar. All these levels are back to November highs following the first set of "positive" headlines by Trump suggesting a trade deal was in the works. We all know what happened after that.
It's almost as though the carnage of November never happened. Tell that to the financial markets and various asset classes that eroded and hedge funds that blew up and closed shop.
Trading markets these days is like soap opera -- but dramatic headlines and heated twitter exchanges dictate volatility, not fundamentals. The bigger question baffling most investors is, "Can the rally continue, or is this another false trap?" To be honest, a lot can change over the next 90 days, it would be naive to think all is sorted, and business is back to usual.
The market dynamics have changed, the players and the game itself. We are driven not only by hedge funds and institutions ("humans") but more and more by computers and algorithms ("machines"). The latter follow chart and momentum patterns, which tend to exaggerate moves on either side before the trend reverses on "fundamental" reasons.
It is almost end of the year "officially," as funds have unwound their gross and net books for the year, given the disastrous performances. I doubt capital will be reallocated so soon during the last few weeks over quiet Christmas period. But if markets manage to regain their highs of November and break sustainably above their respective 200-day moving averages, this rally can have a lot more wind in its sails. After all no "smart money" will come in its way before year end.
Perhaps the clearer move will be seen as the first quarter begins. Make no mistake, the G-20 did nothing other than keep up diplomatic appearances. Yes, Trump has realized he has less sway in bullying China, given the slowdown impact on the U.S. economy itself, but has to "save face" and claim an incredible victory for re-election.
The bigger picture remains unchanged, and investors should be mindful that central banks are unwinding their balance sheets, reducing leverage in the system and USD rates are rising. We have the Fed December FOMC meeting on December 18. If markets rally hard enough, one wonders if Powell will change his tune a bit? The OPEC meeting occurs on December 6, where a cut of 1-1.2 million barrels per day will be put forth to its members, with Russia on board. Oil price is up 5% from its lows. It is to be expected that all asset classes will be marked up today on the "global risk-on" trade. Remember the correlation amongst asset classes has been close to one these last few months.
Ignoring the mark-up today, the key is to identify stocks and asset classes that have solid fundamentals and margin growth, but that were beaten down by more macro/sentiment worries. One should not focus on names that have earnings downgrades and leveraged balance sheets. Use this rally to close out of names that one has been holding onto in the hopes of a rebound. Allocate capital towards the smarter sectors. Be long, but be selective.
Copper is a preferred commodity to be long, as 2019 will see tighter markets with even less supply growth. Oil is fair value at $50/bbl for WTI, but winter has yet to emerge to see the demand/supply balance change. If the OPEC cuts are timely enough, it can help to support the market -- but only support it, as there is a lot of oil around, for now.
Large-cap quality stocks ,like Amazon (AMZN) , Microsoft (MSFT) and Google (GOOGL) , will fare better as they continuously display solid earnings trends, whereas it is best to avoid flashy, but cash-strapped names like Netflix (NFLX) , Micron Technology (MU) and Nvidia (NVDA) -- names loved by investors because they are used to bull markets in 2017, not the new paradigm in 2018.