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Dow crumbled early Friday on the renewed concern of US-China cold war but recovered slightly on talk of China "deadline" extension (March) by Trump

calendar 08/02/2019 - 18:24 UTC

The US stock market (Dow) crumbled almost 300 points early Friday on the renewed concern of US-China cold/trade war after a report that Trump could ban all Chinese telecom equipment makers from use in US wireless networks. The report suggested Trump is expected to sign an executive order to ban all Chinese telecom equipment makers from the US wireless networks.

Earlier, there was another report that the US warns on use of Huawei, other Chinese telecom equipment makers in critical communication infrastructure for possible spying by Chinese authorities, an allegation, Huawei chief vehemently denied. As per reports, the US keeps up the pressure on Huawei and also on China on this issue as leverage for trade negotiations and also urging the EU to take similar steps against Chinese telecom companies.

The US envoy to the EU Ambassador Sondland warned: "There are no compelling reasons that I can see to do business with the Chinese, so long as they have the structure in place to reach in and manipulate or spy on their customers. Those who are charging ahead blindly and embracing the Chinese technology without regard to these concerns may find themselves in a disadvantage in dealing with us. The US may have to be more careful in sharing information, in transacting business, and a host of things”.

The US market was also under stress on lingering tensions about the fate of US-China trade negotiations as Trump will not meet his Chinese counterpart Xi before the March 1-2 deadline after his summit with North Korea’s Kim in Vietnam on 27-28 February, contrary to earlier expectation. Although the “Trump deadline” for China trade deal may be extended, the market is quite confused about the nature of the structural deal, Trump is talking about and whether China ever agrees to it.

There is already an indication that Trump’s self-imposed March 1-2 deadline for China may move and both China and the US could withdraw the 10% tit-for-tat tariffs on each other’s goods depending upon the progress of US-China trade talks on Feb 14-15 led by the US Treasury Secretary Mnuchin and the USTR Lighthizer.

As per a report: “A senior Trump administration official privately said the March 1 China tariff deadline could move: "I do not know what is going to happen to the March 1 deadline. Right now it is in place. But that is right now- it could change via telephone”.

The market is concerned about the lingering trade war tensions between the world’s two largest economies (US-China), which is not only affecting China but also many big US/EU corporates/MNCs, their earnings, and the overall economy, especially the Eurozone for their large trading exposure and dependency on China. Countries from Japan to Germany and Canada are all being affected more or less because of this Trump trade war/US-China trade/cold war narrative.

Like the US, China is now a large consumption economy besides manufacturing and any slowdown or subdued consumer confidence is affecting consumer spending there and US/EU MNCs are also affecting.

There was another report on Friday that the two countries (US-China) have not yet put together a draft on the matters they agree or disagree. The report comes as a key early March deadline approaches. It also follows Trump saying on Thursday he will not meet with Xi before that deadline.

The White House CEA Kudlow also said there is a "pretty sizable distance to go" before China and the US could reach a comprehensive/structural deal, which Trump is aiming. Trump is not eyeing a simple trade deal as the US is now under “China phobia” and scared of China’s rise as an economic as-well-as tech and military superpower. It now seems that China is far advanced than the US in the practical application of artificial intelligence (AI) and other techs including robotics.

But being a “slave” of Dow, Trump can’t afford a real China trade/cold war and at the same time, Trump has to maintain his anti-China rhetorics for his domestic political compulsions (to make America great again). Thus Trump is bound to blink on China and keep extending the trade deal deadline perpetually (until his next term election in 2020) in return of some Chinese trade concessions (like higher Soybeans/LNG purchase from the US). Trump also knows very well that China will never agree to the US demand for structural reform only for the sake of a trade deal with the US. But China will gradually open up its economy for US/global MNCs apart from financial services.

On early Friday, the US market is under stress on China trade sensitive techs (Apple), chip makers, industrials (Boeing) and consumer discretionary (Amazon controversy).

Dow Tumbled Thursday on lack of progress in US-China comprehensive trade deal and global growth concern:

The US stock market (Dow) tumbled over 200 points Thursday on renewed suspense about the fate of US-China trade deal and global growth worries. The White House CEA Kudlow warned the US-China is far away from a trade deal. The market was already under stress after cut of Eurozone growth by the EC earlier in the day, again igniting the fear of a synchronized global contraction/slowdown.

In an interview Thursday, Kudlow, a known China hawk said: “We have got a pretty sizable distance to go here (in US-China trade talks), although Xi and Trump will meet at some point. Trump is optimistic with respect to a potential trade deal”. Earlier Kudlow, told reporters that he expects Xi and Trump to meet, but that when and where it happens is still up in the air.

Minutes later, Dow plunged more after another report pointed out “Trump is highly unlikely to meet China's Xi before March 2 deadline”.

As per the report: “While Trump and Xi are still expected to meet, there's too much work to do to flesh out a deal with China and prepare Trump for a high-stakes meeting with North Korea's Kim Jong Un. Trump's summit with Kim is set for the end of February. Trump and Xi may still meet shortly thereafter March 2, the official said. But the White House officials have advised against merging the two issues, despite China's invitation for Xi and Trump to meet immediately following the Kim summit”.

The report also suggested that the situation was fluid and that the status of the meeting could change after a trade delegation travels to Beijing next week (led by the US Treasury Secretary Mnuchin and the USTR Lighthizer). Earlier, Lighthizer said he and Mnuchin would make a recommendation to Trump on whether to take a meeting after the two returns from the mid-February trade talks from China.

The question is now at the White House what happens to a tranche of tariffs in Chinese goods that is set to double automatically after March 1, in lieu of a presidential order. But the likely outcome is that the tariffs remain at the current 10% rate (as Trump is set to extend the March deadline).

The USTR Lighthizer said as part of a broader comprehensive deal, China is expected/required to remove its retaliatory tariffs entirely, When asked, Lighthizer declined to say what would happen what would happen if a deal is not reached by the March 1 deadline. Further, the report said that the US may also consider an alternative-a snap-back, in which certain tariffs are selectively rolled back, but could be reintroduced if China does not follow through.

On late Thursday, Trump confirmed he will not meet Chinese President Xi before March 2 to seal trade deal. When asked whether he will meet Xi this month to seal the trade deal, Trump bluntly said “No”, shaking his head. He went further and said “Not yet- maybe, probably too soon, probably too soon”.

Overall, it seems that Trump is trying to pressurize Xi by his known bellicose style of negotiations and is also preparing the market for an eventual extension of his “temporary handshake trade deal” with Xi.

On early Thursday, the European Commission (EC) sharply slashed its growth outlook for the Eurozone for 2019-20 as it expects the EU’s largest economies to be held back by global trade tensions, and domestic challenges including the Brexit uncertainty. The EC cuts the Eurozone GDP growth to 1.3% for 2019 from 1.9% in 2018, before rebounding in 2020 to 1.6%. The BOE also cut its 2019 GDP outlook and sees the UK economy growing at its slowest pace since 2009 at 1.5% against an earlier forecast of 1.8%. Germany’s DIHK Chambers of Industry and Commerce also lowered the 2019 GDP growth forecast for the country to 0.9%, sharply down from 1.7%.

All these doomsday growth outlook projections sparked renewed worries of a synchronized global contraction and affected the “risk-on” trade sentiment Thursday. But the US market was also trying to stabilize on “shutdown truce” hopes after a US Senator Shelby said he expects border deal on the weekend or Monday as both the sides are now closer to a deal than ever before. Another US Senator also expressed optimism about the border deal as early as Friday. Meanwhile, Kudlow also told reporters at the White House that Trump will meet Xi in the “distant future”. Subsequently, Dow recovered in the closing session from almost -400 points plunge to close around -200 points lower on Thursday.

Apart from trade and border wall politics, the US market was also under stress on subdued guidance by Twitter, while some regional US banks jumped on potential M&A deal between Sun Trust Bank and BB&T.

On Thursday, the blue-chip Dow Jones Industrial Average (DJ-30) tumbled -0.87% to close around 25169.53, almost at mid-point between the session low-high of 25000.52-25314.26 in a day of moderate volatility. The broader S&P 500 (SPX-500) plunged -0.94% to close around 2706.05, around the half-way of the session low-high of 2687.26-2719.32 in a day of moderate volatility. The tech-heavy Nasdaq Composite (IXIC) crumbled -1.18% to close around 7288.35, almost at the mid-point between the session low-high of 7235.05-7336.74 in a day of volatile trading.

Oil tumbled, dragging the energy sector on global growth and US-China trade war concern while China trade sensitive industrials (Caterpillar, Boeing, and Deere) techs also slid. Chipmakers/semiconductors (AMD, Micron and Intel) were in stress for their large exposure to China. Blue chip techs including FAANG stocks were in stress, while defensives like utilities and real estates were in green.

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

Technically, whatever may be the narrative, SPX-500 has to sustain over 2755 for a further rally to 2775/2790-2825*/2875 and 2900/2925-2950*/3020 in the near term (under bullish case scenario).

On the flip side, sustaining below 2745-2735, SPX-500 may fall to 2705/2690*-2660/2635 and 2605/2590-2575/2555-2530 in the near term (under bear case scenario).

Technically, whatever may be the narrative, DJ-30 has to sustain over 25425 for a further rally to 25485*/25650-25750/25900 and 26100/26275-26555/26685 and 23700/23500 in the near term (under bullish case scenario).

On the flip side, sustaining below 25375, DJ-30 may fall to 25120*/24980-24900/24700 and 24500/24280-24200/24000 in the near term (under bear case scenario).

Technically, whatever may be the narrative, NQ-100 has to sustain above 7075 for a further rally to 7135*/7235-7375/7455 and 7550/7685-7725/7925 in the near term (under bullish case scenario).

On the flip side, sustaining below 7055-7035, NQ-100 may fall to 6975*/6915-6825/6675 and 6590/6550-6485/6440 in the near term (under bear case scenario).


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