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Dow plunged mid-Monday on Trump's probe by the US House Democrats and renewed skepticism of China trade truce

calendar 04/03/2019 - 18:23 UTC

On mid-Monday, Dow plunged almost 400 points from over 100 points rally in the opening minutes despite hopes of a tentative US-China trade deal. Earlier Dow future soared almost 150 points amid an early Monday report that the US-China is very close to clinching a trade deal, even without addressing some core structural issues like China’s SOE reform demand by the US.

But as per some other reports the US reserves the right to re-impose tariffs on China if the US is not satisfied with the enforcement or implementation of structural issues by China. Thus the market may be skeptical about the sustainability of the US-China trade truce in the present reported form.

The market is also under stress after another report that the House Democrats unleashed a sprawling probe of the Trump family and his associates. The Democrats on the House Judiciary Committee on Monday launched a broad probe into possible corruption and obstruction by President Trump, seeking information from dozens of his associates.

The House Judiciary Panel has issued more than 80 requests for documents from associates of the president Trump. The Democrats judiciary committee are expanding their probes into the president’s inner circle and family, as well as individuals involved in the June 2016 Trump Tower meeting; plans to build a Trump property in Moscow; and a scheme to pay off women to alleged affairs with Trump before the 2016 election.

The White House said it has received the House Judiciary Panel letter. When asked if he intends to cooperate with the house judiciary committee's obstruction probe, Trump said cooperates all the time with everybody

As per earlier Monday report, the US may withdraw some China tariffs in lieu of certain trade concessions and withdrawal of certain retaliatory tariffs as part of the trade deal. China made clear in a series of recent negotiations with the US that removing the 10% additional tariffs on $200B of Chinese goods from day one was necessary to finalize any deal. China is offering to lower tariffs on the US farm, chemical, auto, and other products.

The report said: “China and the U.S. are in the final stage of completing a trade deal, with Beijing offering to lower tariffs and other restrictions on the American farm, chemical, auto, and other products. And Washington is considering removing most, if not all, sanctions levied against Chinese products since last year. The agreement is taking shape following February’s talks in Washington, people briefed on the matter on both sides said. They cautioned that hurdles remain, and each side faces possible resistance at home that the terms are too favorable to the other side”.

The report also suggested that the US and China are close in on a trade agreement, which could be signed on March 27 between Trump and Chinese President Xi. In the agreement, China would offer to lower tariffs and restrictions on US agricultural, chemical, auto, and other products. Specific to the car industries, tariffs on imported vehicles would be lowered from the current 15%. China would also speed up the removal of foreign ownership limitations on car joint ventures.

As a trade sweetener, China may also buy $18B natural case (LNG) for Cheniere Energy requirement as part of the deal. On the other hand, the US will lift most, if not all, of the punitive “Trump tariffs” on Chinese imports imposed last year. But the market is also concerned that no details on the core issues of China’s alleged IP theft, forced technology transfer and SOE reform issues, as well as enforcement of the deal.

Meanwhile, further on late Friday, after the market closing, Trump tweeted some interesting China trade comments: “I have asked China to immediately remove all Tariffs on our agricultural products (including beef, pork, etc.) based on the fact that we are moving along nicely with Trade discussions.... and I did not increase their second tranche of Tariffs to 25% on March 1st. This is very important for our great farmers - and me!” Trump’s late Friday China tariffs tweets may be in line with the overall deal report, even without core structural issues, like China’s SOE reform (which Trump also knows very well that it’s almost impossible to implement).

The USTR office has formally scheduled to publish a public notice regarding the extension of trade truce with China. It said in the notice that “it is no longer appropriate to raise tariffs on Chinese products due to the progress of trade negotiations. And, the rate of additional duty for the products covered by the September 2018 action will remain at 10 percent until further notice.” The notice will be published in the Federal Register next week.

China, on its part, said: “There is substantial progress made in trade talks with the US. China-US ties are mutually beneficial, while China to seek cooperation with the US, also to safeguard its sovereignty. China is to strengthen its IP protection and ease foreign investment rules, while stop its case by case foreign investment approvals system.

Meanwhile, China’s National People’s Congress (NPC) begins this week amid lingering Trump trade war and the domestic slowdown. But the market is optimistic that Chinese leadership (Xi) will be able to approve the US-China trade deal (now probably in advanced draft stage), which would be subsequently formally signed between the US (Trump) and China (Xi) late March.

As per the report, the NPC may also approve China’s official GDP growth target between +6.00 to +6.50% with some fiscal stimulus, tax cuts and certain other pro-growth and easing policies. Subsequently, the risk-on sentiment got a boost in the early Asian session on hopes of an imminent US-China trade deal coupled with the Chinese stimulus.

Adding further to the overall trade truce optimism as the White House economic adviser Hassett said the USTR Lighthizer has made a lot of progress with China and the deal may be finished sometime soon. On the other hand, EU-US trade negotiations will also start this week.

But there was also some skepticism despite reports that the US-China trade negotiations are in the "final stages" as the two sides prepare for a possible summit at Mar-a-Lago, possibly around 27th March, after Xi finishes a trip to Italy and France.

As per another report, the US wants the ability to re-impose tariffs on Chinese goods if talks fail on enforcement mechanisms on alleged IP theft and related matters, which may not amuse China and it may be very tough for Xi to approve such trade/cold war deal by the party congress (NPC) this week. Another report suggested that the trade deal being discussed would do little to address key structural issues. These include assurances by China to curb alleged cyber theft and subsidies on SOE the Trump admin argues make it harder for the US companies to do business in China.

The market was also under pressure on soft US construction spending for December, which plunged to -0.6% from +0.8% sequentially, much lower than the expectations of +0.1% growth. Overall, the US construction spending posted the smallest annual increase since 2011 as homebuilding slowed amid rising borrowing costs and a glut of inventories. In brief, it now seems that despite so much economic optimism, an average US prospective homeowner can’t afford a 4.5% annual interest rate for a 30-year mortgage.

The full-year US construction spending reflected a 3.3% increase in private residential construction that was the smallest advance since 2011 against an average gain of more than 10% for six straight years. Housing was always a bright spot of the US economy, but for the last few years, it is under stress on rising borrowing costs, subdued real wage growth and affordability for average US people. On mid-Monday, the US stock market is under stress on healthcare, techs, industrials (led by Boeing and Salesforce)

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

Technically, whatever may be the narrative, SPX-500 has to sustain over 2825 for a further rally to 2840/2865-2900*/2925 and 2950*/2985-3020/3050 in the near term (under bullish case scenario).

On the flip side, sustaining below 2815-2800/2775, SPX-500 may fall to 2760/2745-2730*/2700 and 2675/2650-2635/2610 in the near term (under bear case scenario).

Technically, whatever may be the narrative, DJ-30 has to sustain over 26300 for a further rally to 26555*/26685-26850/26955* and 27050*/27380-27750/28100 in the near term (under bullish case scenario).

On the flip side, sustaining below 26250-26100/25850, DJ-30 may fall to 25700*/25600-25300/25100* and 25000/24750-24550/24200 in the near term (under bear case scenario).

Technically, whatever may be the narrative, NQ-100 has to sustain above 7155 for a further rally to 7235*/7375-7455*/7550 and 7685/7735*-7850/7925 in the near term (under bullish case scenario).


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