The Art of the Deal

The art of the deal.  Ever wonder what happens in the big glass conference rooms between competing multinational corporations in their fight to be… the biggest?  One needs only to follow the drama in DC to get a pretty good example.  Equity markets tried in earnest to gain ground in the beginning of yesterday's session only to be brought down by its on-again off-again foe: the trade war.  Rumors began to spread about China threatening to back out of discussions putting stocks on shaky ground and setting the stage for a Larry Kudlow talk at New York’s Economic Club.  Kudlow, a former economist cum reporter and now Trump chief economic cheerleader talked about the strength of the US Economy and laid out what will surely be the cornerstone of the GOP campaign message in November.  That was all fine, because we all know that the economy is doing great and that some of the Administrations policies have provided some of the fuel for growth, but what of the darker underside of the policy: trade?  Of course Kudlow, a former self proclaimed “free trader” (that means he is against any policy that would hamper free trade on the international trade stage like… tariffs), had an answer painting China as the villains.  He also took an opportunity to highlight the recent weakness of the Chinese economy even being so bold as to say that centrally planned, government controlled economies don’t work.  OK Larry.  The speech and QA that followed was largely a show and, as you might guess, a little comical to someone who knows a bit of economics but what really took traders by surprise was his final statement.  He claimed that he didn’t want to take the wind out of the President’s sails but we could expect a big announcement regarding China… interesting… he then stared at the cameras and said “Just say Yes”.  He was talking to China, of course.  So the brinksmanship was now in the public media.  Markets began to lose altitude as a result and traders prepared for the announcement, which would probably include some new tariffs.  A little later in the session, the President, not willing to be outdone, told reporters that he was going to make an announcement after the close of the market (so as not to affect trading) regarding China trade discussions, and because the markets were still open he could only tell reporters that the result of his soon-to-be-announced policy would result in huge revenues to the US.  Yah, that means he was not leaving much to the imagination of traders who were now being told that the next round of tariffs were going to happen.  It was a real drama playing out for all to witness... the hints, the brinksmanship, the highlighting of an opponent's weakness.  Take note biz school students, this is how deals are done! Stocks traded down on, you guessed it, trade fears led by technology, which is something rather new-ish. Up until now, technology would get a pass on trade issues due to their ability to grow revenues in all economic environments, but yesterday the narrative began to shift.  Investors are beginning to wonder if the mega cap techs would be immune to an all-out trade war, rightly so.  Many of the techs do rely on overseas production and Apple is perhaps, the best example of such a company.  So tech followed Apple down yesterday and the move was further highlighted by Amazon, which fell on fears of a potential data breech, a bribery scandal, and analyst calls to break up the company.  As you might guess, the NASDAQ was hit hardest of the major indices closing just above its low of the session.  It will get support at 7400 and 7307, which will be likely objective for traders in the wake of yesterday’s session (see chart 8 in my attached daily chartbook).  The Russell 2000 also had a weak session closing right around its low of the day.  The Russell will get weak support at the round 1700 and its 1676 Fibonacci line (see chart 7 in my attached daily chartbook).  The S&P and Dow both traded off signaling failed attempts at a new high and breakout respectively.  The Dollar strengthened slightly against the Chinese Yuan on the news of a tariff ramp up trading off its session lows but it was still unable to break above its 6.83 resistance line - the Chinese have been intervening to support the currency.  Bond yields continued to rise yesterday and the 10 year yield to maturity bounced off its 3.02% resistance line ending the session just below 3% and it will start todays session right around 2.99%.  Even more interestingly in the bond world, 2 year treasury yields rose to 2.78%, which is the highest they have been since late 2007.

We don’t have much in the way of economic releases today so traders will be left to further ponder the effects of yesterday’s trade activity.  As promised, the Administration announced that tariffs will be raised in two phases with some exceptions (Apple products), which is not as bad as perhaps was expected. Though the path may seem strait forward, it is in fact not.  There are many dynamics at play including sector rotations, style shifts, higher short maturity yields, currency dynamics, yield spread tightening, an active Fed, just to name a few.  This just means that there is plenty of room left for a debate on whether stocks will continue to march upward or take a pause.  One thing is for sure, a deal will eventually be made and how that plays out for the US remains to be seen.

daily chartbook 2018-09-18