Trump and Xi make the news yet again as trade talks take the US equity markets by storm throughout the whole week. Weakness Ana fear strikes the market early on in the week and middle testing out of North Korea gets suffocated by trade concerns.
A stern gap lower on the overnight session to open the week due to Trumps admitted uncertainty of the possibilities of a new trade deal was just the beginning of the swings lower. More political distress came out of the US, Sanders, Mnuchin, and Lighthizer all added to the downside pressure and concerns over a collective trade deal between the two nations. While Trump slapped on another round of tariffs this week. The increase of tariffs was marked up to the 25% level as S&P 500 and Nasdaq broke below their 50 moving averages.
Trump expressed his concerns throughout the week time and time again over legal issues with China over the trade deal. He was no pleased with their stubbornness in relation to the outline of the deal, not agreeing on anything in any of the chapters.
Equities continued to drop throughout the week on these concerns and big money moved out of equities. China did not hesitate to retaliate when the US announced further measures, the exact retaliation was not specified but the threat alone was enough to bury markets.

To end the week, equities managed to v-bottom off lows, not quite back to neutral let alone positive territory. The upswing was on trade news, more of the week’s conclusion rather than a definite deal, uncertainty for the week wavered and potential of further talks was not off the table. New tariffs took their toll on the market and were priced in.

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 down 0.26%
  • Technology down 3.37%
  • Financials down 2.16%
  • Retail down 3.79%
  • Utilities down 0.60%

Overview of key markets last week (bottom chart):

  • Crude oil up 0.05%
  • S&P500 down 1.05%
  • Silver was up 0.96%
  • Gold up 1.13%
  • US dollar down 0.51%

US/China Trade Talks Over for Now.

This week’s events between the US and China ended in a stalemate. Neither side was able to agree on conditions but apparently “talks were constructive”. Conducive to the downside we saw in equity markets, there is still the possibility of a trade war as uncertainty still looms over the nations. It was noted that China and the US are unable to agree on three key issues in their proposed deal:

-The nations disagree on the removal of remaining tariffs

-China and the US have differences on purchases being in line with demand, China sees US import targets as unrealistic

-The nations have differences over the wording of the agreement.

This past week, Lui He, head negotiator left the US trade representatives office in just 2-hours, with no real result, which prompted markets to dive off the news. This solidifies the uncertainty in the agreements futures. This was just days after Trump showed signs of unwillingness to cooperate in the creation of a trade deal for the first time.

In the continuing trade talks, we can assume three potential outcomes.  A trade deal, increase in tariffs and retaliation and a trade war.

The trade deal is the best possible outcome in which the two nations can agree on a deal in the next few weeks. In which some of the new tariffs are rescinded.

The next scenario involves the US increasing tariffs through continued negotiations from 10% to 25%. In which China is expected to retaliate in raising tariffs as well on US-manufactured goods such as automobiles. China may even become more strict on imports. This could slowly turn into the worst case scenario.

The worst case scenario is a full-blown trade war. In which the two nations ultimately continue to increase tariffs on goods and no deal is reached. The last two scenarios are devastating to both economies and could turn the US equity market into a new bear. The downside could be just what is needed to propel the US into another recession.

The graph below outlines three large downside moves on the China/US trade talk news. The first being the gap lower from the evening open on Sunday night May 5th 2019. This was due to a Trump tweet that magnified the uncertainty of the trade talks ahead. The next spill lower was due to the tariff announcement a harsh increase to 25% from the 10%. China was not accommodative to the upside of the markets as well as Chinese data missed and officials were on the retaliatory front to the tariff news. Finally, after the week of trade talks ended, Sunday, May 12th on the evening markets gapped lower! The drop came on further uncertainty of trade talks in the coming weeks. It seems that we may not see a deal in the near future and even further tariffs being added!

The most successful product the CME has ever added- Equity Micros!

This past week, the Micro E-mini futures contract was released to the market. The CME officially offered a contract that is 1/10th of the size of the E-mini’s, opening the stage to a whole new demographic of traders. Some may be confused, aren’t there micro contracts for certain products already? Such as Forex Futures micros? The answer: YES! However, in terms of equity markets, the micro is a newly released product.

The new Micro E-mini’s contracts consist of the S&P 500 futures, Nasdaq futures, Dow Jones futures, and Russell futures. All 1/10th of the size of the E-mini! With a good broker, all you need is $50 odd dollars in your account as margin to trade 1 contract of the micros. Not to mention, in the first week of trading, the Micro E-mini futures contracts managed to trade well over 1.3 million contracts. (This is inclusive of all four markets mentioned). The product has proven liquid, which will appeal to more traders to enter the markets, and even some FX traders to switch over to futures! FX traders may want to see real order flow and less random volatility in a leveraged market, and this is that opportunity! Take a look at the volume below, based on the first 3 days of Micro trading.

CME Group

The impressive Micro contract doesn’t end its story there, during the first full week of trading, the Micro managed to surpass 2.6 million contracts traded mark.

Compared to the E-mini contracts, that broke the 500K mark in three days of trading, the Micro contracts blew that record out of the water. Nearly tripling it at the same time! On Friday, May 10th the ES Micro managed to clear 670K contracts traded. Another interesting stat about the Micro is that out of the 107 countries that traded the newly added product, 24% of volume came from countries outside of the US! Take a look at the first week of volume day by day on the Micros below courtesy of the CME Group.

The Micro contract presents new traders with a good opportunity to learn futures markets with smaller risk and with skin in the game so trader psychology can get strengthened early on. Imagine not losing thousands of dollars to learn how to day trade, just as many usually do before they turn the corner. The Micro contracts are worth $0.50 a tick (NQ, YM and RTY) and $1.25 a tick for the ES futures. What an opportunity! Along with cheaper commissions and very low margin to boot! Check out the following link for some more information and stay tuned to TPA for further information on the micros.

 

Weekly Economic Calendar

 

Very light week on the horizon in terms of high impact news, barely any news out of the US coming up. However, with trade talks looming over us, we will be very much entertained in the markets. They will not be shy of volatility.
No news on Monday
Tuesday, Average earnings out of the UK and wage price index out of Australia.
Wednesday, CPI data out of Canada pre market, retail data out of the US pre market and employment numbers at night out of Australia. This number will shake up the Aussie dollar.
No news on Thursday
Friday, Parliamentary elections out of Australia

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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.