Trade News Sends Stocks Lower
S&P 500 was up slightly Friday morning as it was very close to its record high. Then negative trade news came out which sent stocks down modestly. S&P 500 closed the day down 0.49%. I think these trade dealings work in trends. When you start to hear grumblings of negotiations not going well, expect more negative news to come out.
We’ve seen this situation play out a few times in the past couple years. First the 2 sides raise tariffs. Then the tariffs go into effect. Then the 2 sides attempt to negotiate. Next negotiations don’t well and the cycle starts again. I’ve been expecting it to be different this time, but the latest news hasn’t been good. We will know more information once the October meetings take place.
Some of the first negative news that came out which previewed what was to come later in the day. And that was that President Trump stated he’s not looking for a partial trade deal. And that he doesn’t need a deal before the 2020 election. Obviously, he can’t say he needs a deal because it will put him in a bad spot when negotiating.
There have been contradicting reports on whether the Trump Administration is looking for an interim or partial deal. To be fair, maybe Trump isn’t looking for a partial deal, but it might happen after negotiations stall. There are numerous ways to interpret what he said, but there’s no question the tone was negative.
News that sent stocks lower on Friday was that the China delegation canceled a visit to American farms in Montana. This cut its visit in America short. Bulls should hope that the China delegation thought it would be a waste of time rather than it being a signal the negotiations haven’t been going well. Combined with Trump’s statement, the posturing looks negative. I honestly can see a deal being made or the entire October trip canceled.
40% Chance Of A Trade Deal
Optimism that a deal will eventually get done in the next 6 months is based on three things. They are: the fact that the Chinese economy is weakening, the country is facing food shortages, and Trump is facing an election in 13 months. It’s in neither side’s interest to keep this trade war going.
A trade war will start to hurt the consumer significantly over the next few months if nothing is done. Don’t think this isn’t a big deal just because August retail sales were strong and September results are looking good. I didn’t expect an immediate decline after the first round of tariffs were put in place in September.
Whether the tariffs set to go into effect on October 15th are implemented will be our next signal as to how well the trade negotiations are going. Negotiations are set to take place in early October. Presumably, they will occur before October 15th. Timing of the talks might be partially why President Trump delayed them to that date. It does no good to implement new tariffs the week before negotiations start.
As you can see from the chart below, Goldman Sachs has created a trade tension barometer which measures the odds of a trade deal that the market is pricing in. As you can see, the latest odds show there is a 40% chance of a resolution. I’m guessing the odds of a trade deal fell to the high 30s after the news on Friday. It wouldn’t be surprising to see the odds spike as we get closer to the October talks like they did this spring. Obviously, that spike didn’t lead to a deal, so that prediction isn’t exactly putting my neck on the line.
Review Of Friday’s Action
There was a minor selloff on Friday as the Nasdaq fell 0.8% and the Russell 2000 fell 0.11%. Tech stocks fell 1.12% because they are the most impacted by the trade war. VIX spiked sharply as it increased 1.27 to 15.32. It doesn’t take much of a decline in stocks for the VIX to spike sharply when it is in the mid teens. It can easily get to the low 20s if the negotiations go sour in the next 2-3 weeks.
CNN fear and greed index fell another 5 points to 58 which puts it barely in the greed category. Stocks are reacting to news flow which makes whether they are overbought or oversold less valuable information. October will be a hugely important month since we have earnings season, a Fed meeting, and trade meetings. I don’t see the market being as volatile this fall as it was last year. At least there isn’t a government shutdown this time.
A treasury selloff that started the month is officially over as treasuries rallied sharply again on Friday. 10 year yield fell 6 basis points to 1.72% which now puts it 18 basis points below its recent peak this month. I’m not predicting the yield to hit a new 2019 low. However, if it stays low, it’s good news for the economy because it will help the housing market.
(It also signals weakness in nominal GDP growth). In the week of September 19th, the average 30 year fixed mortgage rate spiked 17 basis points to 3.73%. That’s still very low. It should stop spiking soon if long bonds are steady.
2 year yield cratered 5 basis points on Friday to just 1.68%. The yield curve is flat and investors see another cut this year. My bet is on it occurring in December because the summary of economic projections will be updated then. There is a 43.8% chance of a cut in October and a 62.9% chance of at least one more cut this year.
Conclusion
Any prediction of a trade deal soon is looking precarious. President Trump stated he’s not looking for a partial deal and China abruptly ended its visit to America. Odds of a trade deal likely fell below 40%. Obviously, that Goldman Sachs model is just an estimate. It’s not unrealistic though.
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