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Dow almost unchanged Friday while broader U.S. market inched up on hopes that Trump will eventually agree for at least partial tariffs rollback for phase one trade deal with China

calendar 12/11/2019 - 11:35 UTC

The U.S. stock market inched up Friday on hopes that Trump will eventually agree for at least partial (existing) tariffs rollback for Phase One trade deal with China despite his suspense about the Chinese demand for such tariffs rollback. On Friday, Dow slips almost -200 points from the session high after the news headline- Trump said he has not agreed to tariff rollback, but china would like him to and China wants to make trade deal more than him.

But Dow clawbacks to almost unchanged and the broader U.S. market inched up to close around another record high after the market realized that Trump actually said he has not agreed to anything on tariffs rollbacks; i.e. he is still undecided and negotiating with China. On Friday, Dow was also buoyed by an upbeat consumer sentiment data amid record-high U.S. stock market, positive for consumer spending, the backbone of the U.S. economy.

On Friday, Trump told White House reporters, when asked about Phase One trade deal with China and the ongoing suspense about tariffs rollback:

“Well, they'd like to have a rollback. I haven't agreed to anything. China would like to get somewhat of a rollback, not a complete rollback 'cause they know I won't do it. But we're getting along very well with China. They want to make a deal. Frankly, they want to make a deal a lot more than I do. But I have no problem even if there is no deal as I am collecting billions of dollars from China (as tariffs)—you know they are paying it indirectly---by devaluing their currency— China would like to get somewhat of a rollback, not a complete rollback 'cause they know I won't do it. But we're getting along very well with China. They want to make a deal. Frankly, they want to make a deal a lot more than I do. But I have no problem even if there is no deal as I am collecting billions of dollars from China (as tariffs)—you know they are paying it indirectly---by devaluing their currency—but I think there will be a deal and that will be signed in the U.S.”

 When asked if he’s definitely going to meet with China’s Xi this year, Trump said: “We’ll see”.

In the meanwhile, China’s twitter proxy, the influential Global Times editor Hu soon clarified Trump’s comments:What President Trump said is not what the markets expect. But he said ‘the US hasn’t agreed to a rollback of tariffs’. It's not a flat denial. What's certain is that if there's no rollback of tariffs, there will be no phase 1deal”.

Elsewhere, the White House Press Secretary Grisham clarified in an interview: “Some tariffs on China will be rolled back if we get a Phase One Trade Deal. And we are very optimistic about China deal”.

On Friday there was also a report that U.S. has offered to co-host canceled APEC summit with Chile on American soil. China’s foreign ministry clarified: “The venue for rescheduled APEC summit (for the signing of Phase One trade deal between Trump and Xi) should be decided by consensus. And the decision should be abiding by the principle of consultation”.

Thus, we are seeing the internal White House trade debate playing out publicly over the past 24 hours. Then Navarro popped up and explained in a radio interview that only the proposed tariff on 15th Dec may be postponed:

“China's tariff report was a trial balloon to force Trump's hand. Trump has not decided on anything yet, but only tariffs that would be postponed are the Dec 15 round. I can confirm that there is no agreement to remove any of the existing tariffs as a condition of signing a phase-one deal. That did come right out of the ministry of propaganda, as it were, in China - was widely misreported in the press”.

“Well, somebody joked to me yesterday that the real negotiations with China don't really start until you have a handshake deal - is what we had in October. Basically, they're trying to renegotiate or re-trade the October deal, and I don't fault them for it. That's kind of what they do. But the reality is that what is on the table is there are the tariffs coming in December - December 15. We would be willing, I think - again, it's up to the president - to postpone those tariffs”.

“But let's remember - yeah, the December 15 one but not rollback any existing tariffs. That's a fine distinction here. Look, the tariffs are really a necessary defense against China's economic aggression against the United States. They are also the only insurance policy we have that China will come to the negotiating table and bargain in good faith. And if you give away any of the existing tariffs, you run the very real risk that you'll never get to Phase two or three. And I think your listeners need to understand that there are seven things we're trying to get done, and the phase one only gets about two of them done”.

Navarro was asked why the U.S. would back off on the tariffs that are scheduled for December 15; Navarro said:

“Well, we have tariffs on existing products. The additional tariffs that we would be - put in place are - would be a goodwill gesture to get us to phase two or three. Again, the idea would be to maybe wait a little while. But, you know, it's not my place here to negotiate in public, which is what the Chinese were doing yesterday. I think what's important for the American people to understand is that China is actively engaged in economic regression. They commit what I call the seven deadly sins. It's the forced technology transfer... Just so the American people understand, we are getting hammered by China. And I think they do. There's really broad support from American people on President Trump's tough stand on China, bipartisan support on Capitol Hill. That's rare these days”.

On manufacturing slowdown and job losses in the sector due to Trump trade war, Navarro denied the ‘allegation’ and said:

“So let me dispute all of what you're saying there-- basically... During the Obama-- years, they lost 200,000 manufacturing jobs. We've added 500 - we've added... You want the numbers - we've added 500,000 manufacturing jobs. The unemployment rate is the lowest since it's been since a man walked on the moon. Wages are rising. Life's good for America. It's better than it was during the previous administration”.

“I, myself, want to work every single day trying to create good manufacturing jobs for the real mobility of this country, people who work with their hands. President Trump's doing a great job in that. And I can take you through Marinette, Wis., Oshkosh, Wis., Lima, Ohio, York, Pa., and Greenville, S.C. I'll take you there. We'll go on tour. I'll show you all the good manufacturing jobs we are creating”.

On early Friday, Dow Future was almost flat on lingering suspense about Trump tariffs rollback by the U.S. and ultimate fate of the much-awaited U.S.-China Phase One trade deal. On late Thursday, the White House trade advisor Navarro contradicted Kudlow’s earlier statement for the removal of partial trade tariffs as part of a Phase One deal with China and said, noting is decided and Trump will make the final decision:

“There is no agreement at this time to remove any of the existing tariffs as a condition of the Phase One deal. And the only person who can make that decision is President Donald J. Trump. And it's as simple as that. China is just negotiating in public, trying to push this in a direction with their propaganda press”.

Subsequently, Dow Future slumped early Friday on renewed suspense of U.S.-China tentative trade deal. But later Dow Future recovered to some extent after the White House (WH) spokeswoman Grisham said: “I cannot get ahead of the talks with China, but we are very, very optimistic that we will reach a deal soon”. As a flashback on Thursday, Trump tweeted after Dow scaled a new record high: "Stock Market up big today. A New Record; Enjoy!" Pointing to that Trump tweet, Grisham said: “The President wouldn't be doing that if he were about to blow up the deal”. Also, as per reports, Trump admin officials are also looking into a potential venue and time when President Trump could sign the phase one trade deal with Chinese President Xi.

On early Friday, Dow was almost flat against this backdrop of lingering suspense and conflicting reports of tariffs rollback. The risk-on sentiment was further affected by some anti-China rhetoric by the U.S. Secretary of State Pompeo, who said in a joint presser with German Chancellor: “Huawei is subjected to the power of Chinese Communist Party”.

In response to Pompeo’s Huawei/CPC allegation, China’s twitter proxy, the Global Times editor Hu said:The CPC has changed China's fate, reshaped Chinese people's lives and insisted friendly engagement with all countries. Pompeo's malicious attack on CPC only smears his own image, making himself look politically bigoted, extreme and dishonest”.

On early Friday, the ‘risk-on’ sentiment was further affected by Navarro’s comments: “The U.S. is willing to only postpone Dec 15th tariffs and that is it for Phase One deal... saving other tariffs to make sure we can negotiate Phase 2 and 3 with China”.

On Saturday, before going to Alabama for an election campaign, Trump boasted about the U.S. economy, job market, record-high stock market, and America’s ‘renewed’ military strength, but disgraced about ‘witch-hunt impeachment drama’. Trump was again asked about China trade deal; Trump said there is lots of incorrect reporting regarding tariffs rollback issues but urged to wait for his action:

“Trade talks with China are moving a lot—moving a lot-- but much slower than I like. And there’s a lot of incorrect reporting---the level of tariff lift is incorrect, but you will see what I am going to be doing-- there’s a difference on tariffs, but we can always get tariffs---they want to make a deal much more than I do. here’s a difference on tariffs, but we can always get tariffs---they want to make a deal much more than I do. The trade talks with China are moving along, I think, very nicely and if we make the deal that we want it will be a great deal and if it’s not a great deal, I won’t make it. I’d like to make a deal, but it’s got to be the right deal”.

“China very much wants to make a deal. They’re having the worst year they’ve had in 57 years. Their supply chain is all broken, like an egg, they want to make a deal, perhaps they have to make a deal, I don’t know, I don’t care, that’s up to them”.

“China forever never paid us ten cents. Now we have literally, we will soon have, literally hundreds of billions of dollars coming in from China (as tariffs in different forms)—we never got anything from China. The Chinese supply chain is all broken like an egg. I gave $28B to American farmers (out of China tariffs) —it’s very amazing—they are very happy. So lots of very positive things are happening with China—I think that people will be amazing. We have to make the right deal for our farmers, manufacturers, and everybody---and if we are not able to make the right deal—I am not going to make a deal with China”.

But on Saturday, Navarro again said on rollback of tariffs:

“Trump will not roll back tariffs for phase one trade deal with China. There's no rollback at all. So we need the tariffs there, but the tariffs are really our best insurance policy as well to make sure that the Chinese are negotiating in good faith. There's no rollback at all, there are no conflicting signals. There is no agreement to roll back any existing tariffs as part of the Phase One deal as it was never on the table when they met and had a handshake deal in October”.

“Phase one only covers limited issues and some of the promises China made are too broad. Other issues on the table, including state-owned enterprise subsidies and fentanyl, are not included—there are seven deadly sins from China and four of those sins are not addressed at all in Phase One”.

“We get is a core commitment on force technology, but it's only a base obligation, so on a scale of 1 to 10, I'd rate that may be a two. So you can see that phase one is in desperate need of phases two and three, which is why we need to keep the pressure on, the tariffs on, and to keep China active at the bargaining table”.

“Other provisions, such as agriculture will be included in Phase One. The opening of financial markets is also a provision likely to be included in a phase one deal. Something that was really never part of the original negotiation, financial market opening, which will make people on Wall Street happy, but doesn't really create a lot of jobs in the heartland”.

Market Wrap:

On Friday, the blue-chip Dow Jones Industrial Average (DJ-30) ticked up +0.02% to close around 27681.24, near the session high of 27694.95; earlier it made a low of 27578.97 in a day of rangebound trading. The broader S&P 500 (SPX-500) inched up +0.26% to close around 3093.08, almost at the session high of 3093.09; earlier it made a low of 3073.58 in a day of rangebound trading. The tech-heavy Nasdaq Composite (IXIC) surged +0.48% to close around 8475.31, almost at the session high 8457.57; earlier it made a low of 8405.89 in a day of rangebound trade.

On Friday, the broader U.S. market was helped by China trade-sensitive industrials, materials, techs and also by healthcare, communication services, financials, consumer discretionary and consumer staples to some extent, while it was dragged by energies, real estate, and utilities. Out of 11-major SPX-500 sectors, 8-were in moderate to slight green. And out of 30-Dow blue chips, 12-were in red: 3M, Amazon, Boeing, Chevron, Coca-Cola, Exxon Mobil, GS, Home Depot, IBM, Nike, Verizon, and Walmart.

Dow was dragged by Boeing amid lingering grounding and uncertainty of its ill-fated 737-MAX jets, affecting the overall image of the iconic U.S. aviation giant. In the latest 737-MAX saga, several big U.S. airlines like American and southwest airlines are now further pushing back the planned return of 737-MAX to March’20. Also, U.S. as-well-as EU aviation regulators have found some gaps in the technical documentation of 737-MAX MCAS software/hardware fix and asked Boeing to take corrective steps. As per another report, Boeing may be now trying to fully redesign the 737-MAX MCAS/cockpit software rather than simple patches and thus it may take more time for 737-MAX jets to flying again.

As Boeing’s 737-MAX jets are now under various controversies related to a basic safety hazard, although Boeing as a U.A. aviation giant would survive (‘too big to fall’ perception), looking ahead it may withdraw or rename the 737-MAX jets for brand image issue.

But Dow was also helped by Disney on an earnings beat and solid guidance coupled with optimism about Disney+ launch. Techs were also helped by Microsoft, while Micron among chipmakers dragged.

Bottom line:

Although Navarro, a known China hawk is trying his best to ensure no existing tariffs rollback by Trump, it may be a simple negotiating tactic (in public). Basically, Trump is actually now pre-occupied with Ukraine impeachment saga and thus he may not be ready for a final decision on existing tariffs rollback and thus keeping all options open. But the tentative trade deal with China by Dec’19 or early 2020 (Feb) will be an eventuality ahead of the 2020 election as Trump will not go for an election with a looming risk of recession because of his China trade war agenda. Even the U.S. ‘patriotic’ farmers, a formidable vote bank for any U.S. President, now also want a trade deal with China rather than government subsidy (aid).

Trump is now under immense pressure on intense public/media attention for the Ukraine impeachment saga, negative for his re-election prospect in 2020. As per reports, Trump’s former NSA Bolton may be the 2nd whistleblower and original ‘Trump insider’, who gave 1st hand information to the 1st whistleblower about Trump’s now-infamous 1st Ukraine call. 

Bolton may be in ‘revenge’ mode after he was ‘unceremoniously kicked-out’ by Trump and as per reports, Bolton may be also a ‘member’ of so-called ‘deep state’, who does not want Trump as next U.S. President (as Trump is against war). There is also an allegation regarding a 2nd Ukraine call, which Trump may soon have to publish (manual transcript).

In brief, Bolton may be going to be Trump’s ‘horror’ in the coming days. And Thus Trump is trying his best to shift media/public attention from impeachment politics to economics (China trade deal and Dow). But any probability of a Trump impeachment or election defeat as a result of Bolton’s ‘disastrous’ testimony would be a huge negative for risk trade (Dow, USD) in the coming days.

The U.S. market is under some stress on election risk as Trump’s impeachment saga may cost him dearly in the 2020 election and the market is still unprepared for it. The market is apprehensive that if Warren comes to the oval office, Dow may plunge at least -25% over a period for her ‘socialistic’ policies. Thus if Bloomberg gets the ultimate Democratic nomination for the 2020 election against Trump, the market will be relieved to some extent.

Technical Outlook: SPX-500, DJ-30, and NQ-100

Technically, whatever may be the narrative, SPX-500 now has to sustain over 3115 for a further rally to 3135/3165*-3200*/3230 and 3255/3285-3305/3330 in the near term (under bullish case scenario).

On the flip side, sustaining below 3105, SPX-500 may fall to 3065/3050-3020*/2995 and 2975/2950*-2930/2915* in the near term (under bear case scenario).

Technically, whatever may be the narrative, DJ-30 now has to sustain over 27800 for a further rally to 28005*/28155-28350*/28615 and 28800/28955*-29100/29300 in the near term (under bullish case scenario).

On the flip side, sustaining below 27775-27750, DJ-30 may fall to 27500/27300*-27200/27000* and 26800/26550*-26300*/26000 in the near term (under bear case scenario).

Technically, whatever may be the narrative, NQ-100 now has to sustain above 8325 for a further rally to 8400*/8455-8510*/8575 and further to 8645/8705-8795/8880 in the near term (under bullish case scenario).

On the flip side, sustaining below 8300, NQ-100 may fall to 8215/8160*-8125/8060 and 8000/7950-7885/7800 in the near term (under bear case scenario).


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