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The U.S. stock market surged Friday on the report of ‘consensus’ for the U.S.-China Phase One trade deal coupled with mixed U.S. economic data, paving the way for another possible insurance cut in Dec. The market was also boosted by Trump’s comments that he is thinking Iowa as a possible location for signing of the tentative trade deal with Xi mid-Nov.
On early Friday, Dow was buoyed by Goldilocks/blockbuster U.S. NFP job report (economic optimism), while hours later undercut by subdued/terrible ISM manufacturing PMI, still in deep contraction (economic skepticism), but eventually boosted by the familiar progress of U.S.-China tentative trade deal optimism as both the nations confirmed ‘consensus in principle’ for a tentative trade deal after the Friday concall.
Dow was boosted by the U.S. NFP headline, which was much higher than the expectations despite GM strike as unemployment levels among African Americans dropped to a record level. Overall, it’s a mixed day of U.S. economic data amid blockbuster U.S. NFP and terrible ISM manufacturing PMI, indicating Goldilocks's nature of the U.S. economy and thus Fed may have no problem in cutting another -0.25% in Dec’19 as insurance against trade war uncertainty (as another mid-cycle adjustment in the midst of an economic expansion). The Fed is now a victim of Trump trade war politics rather than U.S. economics.
On U.S.-China trade talks, as earlier planned, the USTR Lighthizer, the U.S. Treasury Secretary Mnuchin and China's chief trade negotiator Liu He had a telephonic call Friday. Mnuchin said: “We have constructive talks and working hard”.
Although full details of the tentative trade deal (Phase One) haven't been disclosed yet, China may be making concessions on financial services and agriculture as part of the agreement. The U.S. has agreed not to raise existing tariffs on $250B of Chinese goods from 25% to 30% on 15th Oct., while the decision has not yet been made on tariffs on $160B scheduled for 15th Dec. Although Trump is trying to keep the pressure on China to make Phase One deal or face additional tariffs, China wants to remove all types of additional tariffs before Phase One and Phase Two.
On Friday The White House said in a statement that the U.S. trade representatives ‘made progress in a variety of areas and are in the process of resolving outstanding issues. Discussions will continue at the deputy level’.
The USTR said: “U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin moved forward on a range of issues during their call with China’s Vice Premier Liu He, and were working to resolve outstanding issues. The talks are set to continue at the deputy level”.
China’ MOFCOM also confirmed the USTR statement and said: “China and U.S. conducted serious and constructive discussions on core trade points and reached a consensus in principle with the U.S.’ and talked about arrangements for the next round of talks on a deputy level”.
Earlier Friday evening, Trump said he hoped to sign an interim trade deal with Xi at a U.S. location, perhaps in the farming state of Iowa, which is affected by the ongoing trade war and is also a key battleground state in the 2020 presidential election, where Trump won in 2016 with a record margin.
“China wants to make the deal very much. I don’t like to talk about deals until they happen, but we’re making a lot of progress—the negotiations for the phase one agreement were going well and I hope to sign the deal with Chinese President Xi at a U.S. location when work on the agreement was completed. We’re looking at a different couple of locations. It could even be in Iowa---we’re discussing locations, but I like to get deals done first. I would prefer to sign the agreement in the United States. I would do it in the U.S. -- We’re thinking about Iowa, you know why because it would be the largest order in history for farmers. So to me, Iowa makes sense. I love Iowa. It’s a possibility.
When asked if Xi would too be interested to sign such agreement in the U.S., Trump said: “He would too”.
As a pointer, China’s President is also no stranger to the firm state Iowa as he visited the U.S. state twice before his presidency in 1985 and also in 2012. Earlier, there was also a report that China suggested Trump and Xi may meet in Macau, a Chinese autonomous state/city, near to Hong Kong. But China’s Foreign Ministry said a report of the meeting of Chinese and U.S. leaders in Macau is ‘pure speculation’. This follows after Chile canceled scheduled APEC summit mid-Nov due to political unrest there. Trump also tweeted Thursday:
“China and the USA are working on selecting a new site for the signing of Phase One of Trade Agreement; about 60% of the total deal, after APEC in Chile was canceled to do unrelated circumstances. The new location will be announced soon. President Xi and President Trump will do signing!”
On APEC summit cancellation, China’s MOFCOM said: “China understands and respects the decision, and believes that the government and the people of Chile have the ability to safeguard the country’s stability and social peace, as well as restore order as soon as possible”.
As per reports, China’s President Xi will visit Brazil on 12-13th Nov for BRICS summit and certain other Latin American countries and thus Trump is trying to host him around that time in Iowa to sign the Phase One trade deal.
On early Friday (before U.S. market opening), Dow Future was also boosted by an unexpectedly strong Chinese Caixin manufacturing PMI coupled with some positive development on U.S.-China trade truce front as China’s Ministry of Justice issued draft rules related to foreign investment law. This will allow foreign-funded firms to raise funds via stock, bond issuance in China and overseas. This also indicates that China is gradually opening itself to the global/U.S. economy/investors, which is a core demand of the U.S.
Further, there was a deluge of White House jawboning regarding China trade truce prospect on Friday in an effort to keep Dow stable amid doubts about an interim/permanent trade deal and Trump’s impeachment saga.
The U.S. commerce secretary Ross said:
“The Phase One trade deal with China is in good shape and we are pretty comfortable with the deal. We hope to resurrect the date to sign a deal around the same timeframe as the APEC schedule. But you don’t have a deal on anything until you have a deal on everything. Trump uses 'unpredictability' as a negotiating tool with China---and Trump was elected for what he is”.
“We wouldn’t have gotten as far as he has now if he were a run-of-the-mill old fashioned in-the-rut type president. That’s not what he is-- that’s not why American people elected him. They elected him for what he is. He's willing to take challenges, willing to take on some risk. The U.S. and China are still figuring out when and where the two leaders will meet. The U.S. and China are still figuring out when and where the two leaders will meet”.
“It was nice having the natural deadline of the Chilean conference because that made everybody focus on a finite date. Hopefully, we can resurrect a date right in that range because we know there's a gap in President Trump's calendar. We know there's a gap in President Xi's. So the question ought to be where not when. We’re pretty comfortable that phase one is in good shape”.
On Fed, Ross said: “The Fed rate cut announced this week will be good for the housing sector”.
Further, on Trump’s impeachment saga and stock market reaction, Ross said: “Trump impeachment would crush stocks--you can kiss the stock market goodbye if the House of Representatives follows through on impeachment---it’s 100 percent true--look what the market has done since he came in. Now sure, there are occasional glitches in it, but that’s the way markets are”.
On Iran, Ross clarified: “The U.S. is working with allies to ensure adequate oil supplies to contain the impact of Iran sanctions”.
On Friday, after Ross, Kudlow (the White House CEA) popped up and said in an interview:
“One of the indicators that I use is what the official ministries are saying in China. Their comments have been extremely constructive and positive, which reflects what we know on the ground regarding these talks. We’re looking for a venue (for Trump-Xi meeting)--We’d love the timing to be similar (to canceled APEC summit), but it will all be determined”.
“But tariff hikes still on the table until Phase One completed—it’s still on the table until this Phase One deal is completed, or worst case not completed. The president has hinted, depending on the process of Phase One--he ‘maybe willing’---I say ‘maybe willing’, to take a look at those tariffs”.
“Issues to go on enforcement, forced tech transfer may be put into Phase Two. But financial services and FX chapters of the trade deal are virtually wrapped up, along with agriculture-- US-China trade call may be happening now”.
“Enormous progress is being made on IP theft issues, but it’s not yet completed—there is some progress on forced transfer of technology but will probably slip into Phase Two of China trade deal. The agriculture chapter is virtually completed--the financial services and currency stability parts were also virtually wrapped up. Talks involving the forced transfer of technology have seen some progress, but that will likely be part of Phase Two”.
On Fed, Kudlow added: “The U.S. monetary policy is moving in the right direction. There are currently no conversations on getting rid of Fed Chair Powell”.
On Friday, Kudlow was also asked whether he agrees with President Trump that impeachment has hurt the stock market; Kudlow replied: “Yes--I think the impeachment story in fits and starts has hurt the stock market. I think President Trump is right. The White House wants tax cuts for the middle class and President Trump is quite optimistic about a trade deal”.
On other issues, Kudlow said the White House will look 'very carefully' at Peugeot, Fiat Chrysler deal: “We will obviously look at it very, very carefully. The president has not commented on the deal ... We’re not afraid of doing business with international companies, Lord knows”.
But there is also a China angle on this huge translantic auto merger deal as China’s Dongfeng Motors holds 12.2% equity stake and 19.5% voting stake in France’ PSA (Peugeot maker). But there was also a report that China’s Dongfeng might sell its holdings, which could help ease the deal’s passage through U.S. regulators, considering the present U.S.-Chinese trade tensions. When asked about it, Kudlow clarified:
“With respect to the Chinese story, we obviously are alert and on guard. We will welcome a good deal. We hope it will get more production in the United States, more factories and workers, and employment in the U.S. And with respect to the Chinese angle, we will take a careful look at it”.
But the overall optimism over U.S.-China trade truce progress also undercuts earlier in the day as WTO has authorized China to impose $3.579B in compensatory sanctions against the U.S. for failing to remove anti-dumping duties.
After Kudlow, the White House trade adviser Navarro, a known China hawk was more guarded and said on Friday: “The U.S. and China are on a good path to complete the first part of a trade agreement. The linchpin of the agreement was an enforcement mechanism that would allow the United States to impose tariffs for any violations of the agreement, without the fear of retaliation by Beijing. We’re going to need three phases of the deal to deal with all the seven ... structural deadly sins of China”.
On Friday, the blue-chip Dow Jones Industrial Average jumped +1.11% to close around 27347.36, almost at the session high of 27347.43; earlier it made a low of 27142.95 in a day of moderate volatility. For Oct, Dow inched up +0.48% with a low-high of 25743.46-27204.36. The broader S&P 500 (SPX-500) surged +0.97% to close around 3066.91, almost at the session high of 3066.95; earlier it made a low of 3050.72 in a day of rangebound trade. The tech-heavy Nasdaq Composite (IXIC) soared +1.13% to close around 8386.40, almost at the session high of 8386.75; earlier it made a low of 8326.56 in a day of moderate volatility.
On Friday, the broader U.S. market was helped by China trade-sensitive MNCs/exporters-industrials, energies (oil jumped on progress of an interim China trade deal), materials, techs, chipmakers and also by U.D. domestic stories-consumer discretionary, financials (higher bond yields), health care and communication services, while dragged by real estate and utilities (bond proxies). Out of 11-major SPX-500 sectors, 8 were in deep to moderate green, while 1-sector (consumer staples) was almost unchanged. And out of 30-Dow scrips, 12-were in red: Cisco, Coca-Cola, Intel, J&J, McDonald’s, Merck, Nike, Pfizer, P&G, Tesla, United Health and Verizon.
The U.S. market was helped by 3M, Caterpillar, United Tech, Boeing, Apple, Exxon Mobil, Facebook, GS, JPM, Visa and Walt Disney. Apple soared on China, earnings optimism and upbeat guidance for the forthcoming X-Mas holiday sales. Apple also announced a $1B buyback. Apple has also applied for exemptions from Chinese tariffs for its iPhones and various other models/accessories. Exxon Mobil jumped on an earnings beat. The market sentiment was also boosted by upbeat earnings optimism as till now almost 80% of the reported earnings were above estimate, although overall SPX-500 EPS set to slips by around -3% in Q3.
We may see a dual combination of U.S.-China tentative trade deal by Nov’19 or Q1-2020 and another Fed rate cut by Dec’19 or Q1-2020. But before signing any deal, China will ensure at least partial rollback of Trump tariffs. And Trump will also ensure another Fed rate cut before/after China tentative trade deal. But the likely dual combination of U.S.-China tentative trade deal and Fed’s monetary stimulus will be a huge positive for the risk-trade/Dow in the coming days.
Technically, whatever may be the narrative, SPX-500 now has to sustain over 3075 for a further rally to 3090/3105-3130/3160 and 3190/3230-3285/3330 in the near term (under bullish case scenario).
On the flip side, sustaining below 3065, SPX-500 may fall to 3020/2995-2975/2950* and 2930/2915*-2900/2850* in the near term (under bear case scenario).
Technically, whatever may be the narrative, DJ-30 now has to sustain over 27450 for a further rally to 27650/28005-28350/28630 and 28905/29100*-29300/29555 in the near term (under bullish case scenario).
On the flip side, sustaining below 27400-27350, DJ-30 may fall to 27100/26900*-26700/26550* and 26300/26000-25700*/25500 in the near term (under bear case scenario).
Technically, whatever may be the narrative, NQ-100 now has to sustain above 8200 for a further rally to 8255*/8285-8305/8375 and further to 8475/8575*-8705/8880 in the near term (under bullish case scenario).
On the flip side, sustaining below 8175, NQ-100 may fall to 8050/7970*-7900/7840 and 7795/7715*-7680/7630* in the near term (under bear case scenario).
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