China and US trade tariffs lifted? US equities continue the bullishness!


China and US trade tariffs lifted? US equities continue the bullishness!

Yet another green week in equities! A more eventful week in terms of surprise news ahead of the shorter holiday week. US equities broke the 50 day moving average resistance for the first time in months.

The government shutdown still looms over the heads of Americans and investors, however, this week that was overshadowed by the US and China trade talks. Mainly the surprise news of proposed tariffs being lifted, which was shut down quickly by Mnuchin and others. Fake news?

However the real progressing with the trade talks is that, well there is progression and a deal could be reached sooner than later.

Oil prices were on the rise, yet again pressing nearly 30% off lows and trying to get back to the $55.00 level, there is still a long way to go before Saudi Arabia sees its $80.00 but its a possibility.

The earnings season continued as many big name banks reported. Morgan Stanley posted its worst quarterly results since 2016. Goldman Sachs continued its rise off lows as it gained in investing and lending. Bank of America also beat.

In tech earnings, Netflix was one of the first FAANG stocks to report, in which it missed on revenue, but grew in subscribers even with the increase in the subscription fee.

Newmont acquired Goldcorp this week for $10 billion which would turn the former rivals into the largest gold producer in the world. While Elon Musk and Tesla hit the news yet again for a major cost cutting decision, scroll down for the full scoop.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks up 3.77%
  • Technology up 3.98%
  • Financials up 6.78%
  • Retail up 3.29%
  • Utilities up 1.74%

Overview of key markets last week (bottom chart):

  • Crude oil up 2.68%
  • S&P500 up 3.00%
  • Silver was down 1.60%
  • Gold down 0.54%
  • US dollar up 0.86%

Is the trade war over?

This past week news hit from the US that might bode well for the proposed trade war. News out of the Wall Street Journal suggested that the US was seriously considering lifting or easing the tariffs on China. Was this said just to boost markets? Because it did and added to the huge rebound off the Christmas Eve lows. We are now trading over 15% higher than that low. Trump’s was right on the money when he said that markets were primed for a long opportunity a few weeks back.

Buy stops ran to say the least. Take a look at the chart below.

Equities pop on proposed trade war settlement.

Equities have been pressing higher for all of 2019 now, is this just the PPT/ the US government trying to boost the market. Remember talks of decreasing interest rate hikes throughout the year. However, its super important to know that risk off assets have been dropping on the way up. A sign of a convincing rally. The earnings season has been somewhat kind to overall markets as well.

There was a dispute within the US about the trade tariffs, naturally of course. The Trump Administration is for lifting tariffs (Mnuchin) , while the Trade Rep (Lighthizer) stands firmly behind them. Even though the Treasury denied the claim of lifting tariffs.

In recent news, weak economic data out of China put pressure on global equities, which did not last. Now China is stipulating to an increase in consumption as a driving force to strengthen their economy. More so of higher quality goods in rural areas. An interesting proposal considering the consumer debt in China. Which has drastically increased in credit card debt and mortgage loans.

The proposition out of China to increase annual imports from the US would have a major impact on the Chinese trade surplus reducing it from $323 billion to zero by 2024. In the last meeting between the two nations, a proposition to eliminate this balance was place for a two year time frame. Rather unrealistic. The algo buying was quickly faded in Friday’s session. We’ve seen this before. China offered a similar deal, to import more US goods in May to help settle the deal. Which did not help the process.

Everything seems rosy in the US, stocks are closing at highs going into the weekend and economic growth is moving along smoothly. Putting some ease on investor shoulders. This market movement and economic movement puts ease on the Fed as well as this gives them time and leeway to make a decision regarding future rate hikes. If markets continue to rise, no ones going to be mad at Powell for raising rates. They’ll be justified!

However, the government shutdown seems to be going strong in the US. The consolation of the government will be a good addition to the market’s upside. Let’s take a look at what happened in other markets amid all the news that hit this week.

What’s gold up to? Or down to…

Over the past year, even though it has been about three weeks since the turn of the year; gold has been on the rise. Outperforming equities.

Wait how is gold going up as equities are on their way up? Why the convergence? Well one of two things was bound to happen and one did happen this Friday, January 18th 2019.

Gold was either going to break the $1295 level and run buy stops past the $1300 which would’ve prompted equities to drop as US bonds rallied. Or the commodity was going to drop into the $1280 level through the current $1288 support.

The latter happened. Overnight, selling ensued and the downside opened up on gold the bears came out in full force as equities continued to break higher on proposed trade deals.

Lets take a look at gold futures. The trend line that held since the beginning of December finally broke to the downside. Over the past three weeks gold moved in a sideways range, with the anticipation of a break as equity markets were on the rise. The break finally came, into our support zone at the $1280 area. Volume on the break lower was higher than normal, but could’ve been larger for a more convincing trend move.

Seasonally, this was not support to happen! We were expecting a break of the $1300 level on increased demand of precious metals and increasing mining stock prices. Taking a look at gold seasonality below, the beginning of a year, halfway through January, we would expect a pop in gold. There is still time for this top happen, however the commodity is running out of time.

Image result for gold seasonality

Alternatively, mining stocks generally rise in the beginning of the year as tax loss selling ends in December. This did not happen this year! Instead mining stocks fell. What’s even more surprising is that the current economic conditions would be primed for a jump in gold. Inclusive of a dovish Fed and increased debt.

The seasonality may be off, its never perfect! The drop in gold does help solidify what is currently happening in equity markets. Risk off like gold and bonds should be declining as stocks rise, due to the inverse correlation. If that was not the case, there could be a lot said about the rally in equities.

Tesla in the news, again..

Last week Tesla was in the news for increasing the price tag on the automated feature and removing it as an option all together. Leaving those who already pre-purchased the product disgruntle due to excessive delays in delivery.

This week, however, more employee cuts and news of expected profits decline hit the wire. Prompting a premarket slide, of 8%. The stock opened at $323.00 and closed at $302.26. Dropping 12.97% on the day.

Tesla on a daily time frame.

In an effort to press Model 3 production and cut costs, Tesla announced that it plans to cut 7% of its workforce. Musk emphasized that this was the only decision left after having increased the Tesla workforce by 30% last year.

The Model 3 was introduced with a $35 000 price tag, now $10 000 higher than that. The workforce was increased to help get the product on the market. This might seem like a lifelong operation to some!

In Q3 Tesla surprised earnings with a huge beat, this time around however, expectations have dropped. The Q3 number was around $312 million and Tesla proclaims they will not be repeating this earnings report this time around.

Will Tesla be able to beat these record breaking earnings when the distribution of the Model 3 takes a leap forward?

Weekly Economic Calendar

A slower week in terms of scheduled economic news as the US government shutdown continues. This limits the data released out of the United States. Martin Luther King day will also be observed in the US, meaning that markets will close at 1:00 PM EST on Monday. A short trading week approaches. However we will be abundant in opportunity. There is a possibility more news to come out concerning trade talks between China and the US.

Sunday- GDP data out of China, which could dictate how global markets move overnight.

Monday-no high impact news.

Tuesday- average earnings index out of the UK. CPI data out of New Zealand. The day ends on BOJ news, an outlook report and a monetary policy statement. Watch the JPY on this news release.

Wednesday- the BOJ press conference is tentative. Canada released core retail sales data pre market. In the evening Australia releases employment data, watch the Aussie dollar.

Thursday- Main refinancing rate and an ECB press conference out of Europe. This will be an important report for the Euro, watch FX markets.

Friday- No high impact events.

Weekly Economic Calendar Forex Factory

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