Trade talks hit the market this week as well after a trade talk-intensive week. US and China at each other’s throat as the market opened up strong to begin the week but managed to give back all of the gains on the last day of the week.

Iran news hits the market too, the oil tanker attack was not the beginning and end of Iran in the news. Iran suggested that there were concerns in the Middle East over the US military confrontation.

On the back of last weeks, China/US trade talks investors found a dip buying opportunity just at the 2800 level. Price rallied off that support level off inflows of capital, investors found a “cheap” opportunity in equities and took it. There was good news in terms of overseas trade talks, Trump delayed Auto tariffs to the EU, helping the aggressive rally in equity markets.

Early on Friday China announced its complications with the US over trade talks after Trump cracked down on Huawei but markets overshadowed a lot of that bad news throughout the day by focusing on a new deal to eliminate steel and aluminum tariffs between Canada, the US and Mexico.

The Chinese Yuan remained under significant pressure as data points coming from the region remained disappointing and reports continued to suggest trade talks were at a standstill. It resulted in Chinese press recycling reports that the PBOC would defend the 7 Yuan to the dollar level if the weakness accelerates. Friday also saw UK Brexit talks between PM May’s Conservative Party and the opposition Labour Party break down, leaving another round of indicative votes as the most likely course of action. For the week, the Dow lost 0.7%, NASDAQ declined 1.3% and the S&P dropped 0.8%. The Dow saw its first 4-week losing streak in three years.

Stock Market and Sector Overview

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

  • Energy stocks down 0.42%
  • Technology down 1.01%
  • Financials down 2.08%
  • Retail down 3.29%
  • Utilities up 1.45%

Overview of key markets last week (bottom chart):

  • Crude oil up 1.74%
  • S&P500 down 0.29%
  • Silver was down 2.47%
  • Gold down 0.58%
  • US dollar up 0.51%

Trade deals, trade numbers, import/export all make headlines.

Over the past week, markets may have experienced more jawboning than significant institutional buying to prop prices up. Buy the dip was not on high inflows or volume for that matter, Trump had something to do with this upside… again. Last week we had substantial outflows in institutional equities and a flood into risk-off such as gold. This week little inflows helped price rally significantly midweek.

Last week Chinese export and import numbers came out, and they disappointed, this week US imports and exports come out on weak Chinese deflationary data. Out of the US, import prices were expected at +0.7% year over year and were expected to increase into the summer but the actual number came out at a fall of 0.2%, missing substantially. Export prices increased 0.2% year over year versus the 0.6% increase that was expected. Ex-petro imports have fallen 0.6% month over month and a 1.0% drop year over year. The trade talks are really putting a damper on US and China export data which is not sustainable growth for either nation.

Global trade is flying by the seat of its pants and global growth is suffering, even before the trade tension re-emerged. Out of China economic data slumped aggressively, investments down, industrial output data down and retail data down… More than forecast. The US was no different, factory production fell for the third month, and retail data slumped. Even Europe was showing signs of weakening out of Germany.

Chinese export data is important to the world, not just the nation itself and if the manufacturing data or export data falters, there will be a ripple effect. The US takes in about 4% of Chinese output, should manufacturing data get shaken up, Taiwan and Korea will feel the effect. On the other end, the US exports 5.1% of agriculture and about 3% of its manufactured goods to China. According to Bloomberg, between the two nations about 1% of global economic activity rests on the shoulders of this trade deal, may seem insignificant but the ripple effect is substantial. The economic slowdown is nothing new, but the import/ export data brings it more front and center. Tariffs imposed have already affected US consumers. Laundry equipment prices soared and other consumer goods like furniture and bedding, housekeeping supplies and sports vehicles have risen on average about 2.5%.

Before trade escalations, global trade data was slumping, starting in 2017 as it was near and just above the 20% year over year gain marker. Late in 2018, the 0% advancement level was crossed to the downside. Global export data is at its weakest level since the crash in 2008/09, so are exports to advanced economies, and finally exports to the EU.

Making a shift from import and export data to Trade Deal news. Trump is still adamant on a trade deal with China, letting talks dwindle won’t be good for anyone and Trump experienced that first-hand last week. At the first sign of a potential complete break down of talks, US markets fell significantly. Trump is one to care about the performance of the US market as it is a barometer of the overall economy and his presidency after all. After increasing tariffs last week, Trump still wants to make a deal happen with China. Only “when the time is right”, and continues to talk up his relationship with Xi.

However, this past Wednesday we saw a substantial rally on more trade news. This time around eyes were on Europe. Trump said that auto tariffs to the EU would be delayed (expected at 25%). The auto import tariffs are set to be delayed by 6 months, just days before the May 18th deadline. Trump seems a little more understanding when it comes to Europe and Japan in terms of a trade deal while pressing on China. Below is the pop on ES futures on a 5-minute chart, due to the delay of tariffs.

So what does the future hold for the US-China trade deal? Lets cut the back and forth twitter banter and focus on the core of the trade deal. There is a clear difference between the views of both camps. They can’t to seem to agree on anything, however out of the US, Mnuchin hinted that trade talks are still in the works. While Chinese media used “trade war” for the first time in a year instead of the phrase “trade friction”. Meaning tensions, in the eyes of Chinese officials, are ramping up and could forecast some larger changes in the Chinese Yuan as we have seen before. China has also taken action on foreign investments, restricting the ability to invest overseas, mainly in the US. In terms of the Yuan, China has devalued their currency before and it is a risk that China does it again!

This past Thursday, the Chinese Yuan broke resistance moving into the 6.93 level, which neutralized Deutsche Bank, and Chinese worries that it would break above the 7.00 level on the USD/CHY. With this flush lower, Chinese policymakers may shift their perspective on the CHY moving into the 7.00 level.

Early in the morning on Friday, China announced that it has been pushed to the brink, no more trade talks. Trump went and blacklisted Huawei, aggressively attacking China’s largest telecom service. This makes it extremely hard for Huawei to purchase parts from America, this may be the thing that does it…ends the trade talks. Later that day, it was announced that trade talks stalled…

In coming weeks, we expect US to slap tariffs on the auto sector, which was announced to be delayed.

On June 1st, China is expected to increase tariffs on $60 billion of US imports, which represent just under 2500 US goods. Along with the implementation of the increased tariffs from the US on Chinese goods from 10% to 25%.

On June 17th talks on the potential implementation of 25% tariffs on all Chinese goods will be held by the USTR.

On June 28th, Trump and Xi are both going to participate in the G20 meeting in Japan and will likely talk about the trade deal.

 

Weekly Economic Calendar

Slower week ahead in high impact economic news on the horizon. There is a lot of data expected out of Europe with limited high impact news out of the US other than the FOMC meeting. We may anticipate more trade talk news out of Trump this coming week, maybe more tape bombs?

Monday, Monetary policy meeting minutes out of Australia in the evening. What the Aussie dollar attentively.

Tuesday, tentative inflation report hearings out of the UK and retail sales out of New Zealand in the evening.

Wednesday, CPI data in the morning out of the UK, Core retail data our of Canada premarket. Then comes the much-anticipated event out of the US, the FOMC meeting minutes in the afternoon which will move equity markets.

Thursday, European data in the morning out of France and Germany, with the European Parliamentary Elections set to begin.

Friday, Retail sales out of the UK pre-market, and core durable goods orders out of the US, Euro elections continue.

Saturday, Euro elections continue.

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