Stocks Rise On Trade Hopes That Might Be Dashed

Stocks Rise On Trade Hopes?

Stocks rose on Wednesday because of hopes for a trade deal. There was a report that China would accept a partial deal. This is the type of report many don’t buy. Mostly because the actions from both sides speak louder than these so-called reports. Both sides want to appear willing to make a deal. But it doesn’t look like they are close to making one. 

Now it appears the ‘glass half full’ way to look at this is at least they are meeting. There’s a long way to go from just meeting to any actual progress towards a deal. Expectations are low. That’s a positive. Unfortunately, there is good reason for expectations to be so low.

In response to America’s visa restrictions on Chinese officials, China announced tighter visa restrictions for US nationals with ties to anti-China groups. This is a ‘tit for tat’ in the wrong direction. I put a question mark after the subheading of this section. 

Stocks rose on Wednesday, but sold off after hours because Wednesday’s hopes were dashed. The report that sent stocks falling was that America and China have made no progress with deputy level talks. And that Vice Premier Liu He might leave earlier than planned. Then the selloff was tempered when the White House stated they didn’t hear of any travel changes from the Vice Premier.

Thankfully, the reports on negotiations, which have been inconsistent, will give way to actual talks soon. I don’t expect them to go well, but neither does the market. I’d be surprised to see a large drop in stocks if there’s no progress made. There definitely will be a decline though. Many see at least a reversal of Wednesday’s rally.

Wednesday’s Action

Stocks rallied on Wednesday as the S&P 500 was up 0.91%, the Nasdaq was up 1.02%, and the Russell 2000 was up 0.47%. That rally can easily be revoked on bad news on trade which it seems like we will get in the next few days. I think stocks would rally more on good news than they would fall on bad news because few expect major progress towards a deal. 

VIX was down 1.64 to 18.64. I expect it to rise above 20 again this month. This will probably go down as a volatile month given Warren’s gains in the polls, the fact that trade negotiations are going south, and that earnings season has caused Q4 estimates to fall sharply. The market is 0 for 3 when it comes to news events. Only good news is the Fed will be forced to cut rates this month. That won’t make up for cyclical weakness and bad headlines.

CNN fear and greed index only increased 1 point to 30 which is still fear. As you can see from the chart below, the put to call ratio agrees as it signals stocks are very oversold. Problem is stocks don’t just rally because they oversold if the news is bad. 2 new rounds of tariffs on China and Europe won’t be good for an economy that’s reaching stall speed. 

Every sector rallied on Wednesday as investors hoped for positive news on trade on Thursday and Friday. Tech sector was the leader as it increased 1.45%. This sector has reacted the most to news on trade.

Reaction To Fed Minutes

Besides the trade reports, stocks also reacted to the Fed Minutes. Even though the Fed said markets may have gotten ahead of themselves in terms of expecting more rate cuts, the Fed funds futures market priced in an even higher chance of cuts. That’s partially why stocks rallied. 

Increased expectations for cuts steepened the yield curve slightly as the 10 year yield is at 1.57% and the 2 year yield is at 1.45%. It’s confusing how the yield curve steepening signals a recession since rate cuts help the economy. I’m more concerned with the trade war and the cyclical slowdown than I am with rate cuts. They will have a modestly positive impact on the economy next year.

Even with the Fed funds rate very low, the yield curve is still relatively flat. That shows how incredibly low the long end of the curve is. Investors aren’t confident about future nominal growth. A main catalyst for improved growth is monetary stimulus. It doesn’t seem like there’s any other catalyst for acceleration. But it also doesn’t seem like there’s enough weakness for a recession. The trade war will test that theory as it ramps up in October and December.

Market priced in higher odds for cuts after the mixed Minutes. Odds of a cut in October increased from 83.4% to 85%. I think the rate cut is completely locked in because trade negotiations don’t look like they are going well. Fed has cut rates the past 2 meetings because of the global slowdown and tariffs. It can do it again. 

Odds of a 2nd cut in December rose from 42.6% to 45.2%. This cut isn’t locked in, but it seems like the market is trending towards expecting a cut. Once the trade meetings end this week, we will have a great idea of the near term future of monetary policy.

Conclusion

Stocks rallied on Wednesday on hopes for progress on a trade deal, but it probably won’t come. Premier Liu He might not leave America early. But it doesn’t look like either side is willing to make the concessions necessary to make a deal. 

Good news is expectations are so low that the fact that they are meeting is considered to be good news by some. It took about 5 months for the 2 sides to talk again, but nothing seems to have changed. It’s surprising to see neither side willing to give in since their economies look weak. 

Stocks appear to be oversold. But they won’t rally if there isn’t progress towards a trade deal and earnings season is bad. 

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