US To Meet With China & Europe As Tariffs Are About To Be Implemented

Stocks Fall Slightly On Trade Worries

The stock market fell slightly on Monday because of fears progress on a US China trade deal won’t be made in the negotiations later this week. Latest report is Vice Premier Liu He told dignitaries he won’t offer commitments on reforming Chinese industrial policy or government subsidies. Personally, I don’t think it’s wise to trade on reports. Obviously, there will be conflicting reports because all statements are part of negotiations. 

A deal won’t be made through the media. We need to wait for the in person negotiations to start before we can form any opinions on how it’s going.

Even though stocks have tried to price in what will happen, if there is significant progress on a deal, they will spike sharply and if there isn’t any progress, stocks will fall sharply. I can see a 3% rally in one day if there are reports about a deal being close and a 2% decline if there aren’t. 

One aspect to keep in mind is Liu He was stripped of his designation as a “special envoy” after last trip. Hope is that doesn’t make him much tougher in these negotiations. There could be further declines in global trade growth if a deal isn’t made. Both economies aren’t in great spots. There are definitely reasons to make a deal.

European Meeting On Trade Coming As Well

As you can see from the chart below, the trend in global trade increasing as a percentage of GDP had ended after 6 decades. The average tariffs on American imports has increased sharply after being in a downtrend for over 200 years.

Besides the meeting with China on trade this week, America is meeting with Europe next Monday after it recently won a WTO ruling which allowed it to put $7.5 billion in tariffs on Europe. WTO decided Europe gave illegal subsidies to Airbus at Boeing’s expense. 

Tariffs include a 10% tax on French, German, Spanish, and English aircrafts, a 25% tax on single-malt Irish and Scotch whiskies. As well as garments and blankets from the UK, a 25% tax on German coffee and tools, a 25% tax on cheeses, olive oil, and frozen meat from Germany, Spain, and the U.K., and a 25% tax on certain pork products, butter, and yogurt from multiple countries.

Taxes are set to go in place on the 18th. That means, just like how America is meeting with China before its latest round of tariffs will go into place, America is meeting with Europe before these tariffs are implemented. America stated any countermeasure by the EU will be deemed illegal by the WTO.

Review Of The Action In Markets On Monday

Nasdaq fell 0.33% and the Russell 2000 fell 0.19% on Monday. We usually see tech and the Nasdaq underperform when there are trade worries, but only the former occurred. Tech slightly underperformed the S&P 500 as it fell 0.48%. VIX increased 0.82 to 17.86. I’m interested to see how much the VIX pops if the trade negotiations go south. CNN fear and greed index fell 2 points to 30 which is fear. It’s weird to see fear with the S&P 500 down 2.91% from its record.

As you can see from the chart below, the 5 day moving average of the put to call ratio is giving a bullish signal. In the past 4 years, it has a win loss ratio of 30 to 0. The average gain is 8.7% and the max gain is 21%.

Only positive sector on Monday was communication services which increased 3 basis points. 2 biggest losers were consumer staples and energy which fell 0.72% and 0.92%. As you can see from the chart below, the S&P 500 is approaching the period where it has historical seasonal strength. 

A Santa Clause rally starts in the last week of October. That’s not enough of a reason to buy stocks though. Last year showed how negative catalysts can ruin normally strong periods. This year the Fed is on the market’s side, but the economy and the trade war are worse.

October 30th rate cut is barely locked in as there is a 71.1% chance of a cut. Odds of a cut fell from 78% on Friday. Yes, whenever an action has odds of above 70%, it’s very likely. However, there are so many news events, principally on trade, that can change the odds. 

Recently, the odds of 2 more cuts this year have slid off the table. Odds were once near 50%, but now they are 34.6%. Two more cuts would be the Fed admitting there is a recession. How could the Fed do that with such low jobless claims? The Q3 GDP report could help the case for 2 cuts as growth is expected to be 1.7%.

Earnings Calendar

The calendar below gives an overview of the most anticipated Q3 earnings reports. Besides the major banks and Netflix, in the next 2 weeks investors will be watching CSX, American Express, Visa, Chipotle, McDonald’s and Twitter. In the following 2 weeks, we’ll be following Facebook, Apple, Altria, Exxon Mobile, Mastercard, and Disney. 

Companies that oddly left off this calendar are Amazon (October 24th), Alphabet, (October 28th), and Microsoft (October 23rd). I’m the most bullish on Altria because I think its selloff related to the regulation of vaping and the canceled merger with Phillip Morris is overdone. The company is still a consistent earnings grower and has a high yield (8.36%) in a low treasury yield environment.

Conclusion

Markets are awaiting the U.S. China trade negotiations which will occur on Thursday and Friday. That means stocks will react more to reports than usual. I still don’t trust any of these reports until actual news comes out. 

Good news for stocks is the put to call ratio states they should rally and we are entering a seasonally strong period. Besides the trade talks, earnings season will start heating up next week. Personally, I’m not that optimistic about Q4 estimate changes in the next few weeks. 

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