US equities find a bid pre G-20 summit. Powell and Trump/Xi to help US markets?

The downside in US equity markets was stalled due to the doveish Fed Chair speech this past Wednesday. Jerome Powell who previously said that rates were far from their neutral range, causing hawkish sentiment to hit the market. Announced this past Wednesday that the neutral rate was closer than we were previously led onto believe. Current rates being “just below” the neutral rate.

Powell’s speech helped the bulls out by slashing the probability that rates will be hiked more aggressively in the next year. We still however anticipate one rate hike late this month and three in 2019 to bring rates back to “neutral”. US data came out a little more bullish while economic growth in Europe remains uncertain, not to mention oil continues to test lows;

Trump and Xi have continued their trade banter this week. Starting off the week very opposed to easing tariffs, Trump changed his tone as the G-20 summit approached. He seemed more willing to talk about potential tariffs into the end of the week. The US delayed further tariff implementation and markets enjoyed the proposed opportunity to reach a deal with China.

The US Treasury yield curve flatted out a little this week as yields dropped. The flattening suggested a potential inversion as the 2 and 5 year yields converged on Friday to a few basis points.

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 2.09%
  • Technology up 4.57%
  • Financials up 2.45%
  • Retail up 1.92%
  • Utilities up 2.48%

Overview of key markets last week (bottom chart):

  • Crude oil down 0.96%
  • S&P500 up 5.09%
  • Silver was down 0.88%
  • Gold down 0.12%
  • US dollar up 0.10%

Trade war, to come to an end?

Tariff talks were the economic focus for all of 2018. In April of 2018, the first Chinese tariffs were announced, only to be put in effect in August. Additional tariffs in May and July, being imposed from September to November. However the proposed tariffs were around $1 trillion, while about $250 million were actually set into motion. With $267 billion being in hot pursuit of the first $250 billion. While China has imposed $110 billion in US goods.

Its been a turbulent and indecisive time with Trump announcing more tariffs then denouncing them every other week. However this weekend, the G-20 began and it is expected to end with a dinner between Xi and Trump. Where both parties would find it in their best interests to come to some kind of agreement.

Just this part week, Trump threatened more tariffs on China, which we’re almost rescinded as the week ended. Just this Friday, Trump was in a meeting with Japanese Prime Minister Shinzo Abe. Where he said that making a deal happen would be the best outcome, and that American has been working very hard to make that happen.

Traders will be keeping a close eye on the summit in Buenos Aires, looking forward to the outcome of the Trump/Xi dinner, which has been dubbed as a representation of “an important milestone in the continuing US-China trade tensions” and “an opportunity to de-escalate the trade dispute between the two countries” (Goldman). While Reuters has gone as far as to say that this is the “most important meeting of the US and Chinese leaders in years”. This is clearly a monumental meeting, which the whole world will be watching.

As the news of Trumps optimism hit the markets, a bid was caught into the close bringing markets even higher off the Powell news earlier in the week. China hopes that Trump’s plan to abandon the tariff hike on the $200 billion of goods is set in motion after this meeting. Trump planned to hike tariffs to 25% from 10%.

Goldman outlines three possible outcomes of the meeting and the odds that accompany each outcome. A truce between US-China has just under 40% of a chance. A deal has a 10% chance. Escalations have a chance of just over 50%. The worst outcome unfortunately has the highest chance of occurring. This was however before the news hit this weekend (scroll down for the outcome).

A truce, with a chance just under 40%. The tensions have began to ease, as of late. Because the talks of a truce and an interest in a deal has been a recent topic, the likelihood of it happening is not that high. The truce would also prevent the US from imposing further tariffs or threats for the time being, which would postponed the increase to 25% in tariffs. During this truce, China would have to potentially agree to purchase more US exports and commit to a set of reforms. However, from a political standpoint, the US may not be as likely to look for a truce as it would seem. There have been many Senators that have pressed Trump to not back down. Although possible, does not seem that likely that a truce will be reached.

A deal is deemed to be a 10% outcome. The idea of a deal passing through in the midst of dinner is highly unlikely. It wasn’t even a week ago that Trump was adamant on more tariffs. It was only recently that he took a more cooperative stance. However, there is still a possibility of the two presidents agreeing on a subset of concessions. It will be difficult to reach this deal in such a short amount of time however, there is probably insufficient groundwork done on both ends for a deal to be hit at the dinner. Making this scenario very unlikely, but not impossible.

Finally, escalation at just above 50%. This is the most likely outcome of the three, just this week Trump was eager to increase tariffs. However, there might be a more optimistic tone coming out of the dinner, there is no reason for Trump to delay the increase to 25% in tariffs previously proposed.

The three outcomes above are all possible outcomes, and will effect US equities in drastic ways. No matter the outcome of the meeting there will be further volatility for markets. The truce will be bullish for US equities, pressing the S&P 500 higher. A deal would be overzealous for the markets, pressing the bid skyrocketing while the escalation will probably see the S&P 500 back in negative territories for the year.

(Outcome of the dinner below the image)

Image result for xi and trump

Just this weekend, the truce was reached, Goldman, having priced it just under 40%. A halt in imposing new tariffs was discussed at the meeting and promised, declaring a truce. After Jan 1st 2019 there will be no additional tariffs imposed by either party. Coming into the dinner, Trump was optimistic, hinting at a truce. Meaning that we can expect some optimistic US equities at the open of the week.

Weekly Economic Calendar

We’ve got an exciting week ahead of us, as the G-20 summit wraps up we expect markets to react early in the week. It does not end there however, the upcoming week is full of high impact news events that are sure to cause some global market volatility. Day traders look forward to weeks like these.

Monday, ISM data out of the US and RBA rate statement news out of Australia. Watch the Aussie dollar carefully.

Tuesday, BOE Gov Carney speaks in the morning, and GDP numbers out of Australia,

Wednesday, the first of many news filled days, ECB president Draghi speaks in the mornings, watch the Euro carefully as he goes on the wire. Fed Chair Powell then goes on the wire, pre market, which should bring some movement about depending on his tone. BOC rate data comes out, this is going to present opportunity in the CAD. US ISM non-manufacturing data, oil inventories and retail sales out of Australia will wrap up the day.

Thursday, the high impact market-moving news continues. OPEC meeting is an all-day event which will move oil markets. Trade balance and BOC news will move the CAD. Powell warps up the day in the evening where he can bring movement to the evening session.

Friday, the end of the week presents traders with more volatility. Employment numbers come out in both the US and Canada pre market.

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