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Wall Street closed mixed Tuesday on Trump impeachment saga-political/election risk and U.S.-China trade deal deadlock; Dow Future inched down early Wednesday

calendar 20/11/2019 - 14:24 UTC

The U.S. stock market closed mixed Tuesday on Trump impeachment saga-political/election risk, and U.S.-China trade deal deadlock. Also, subdued report cards from Home Depot and Kohls have raised fresh concern about the strength of U.S. consumer spending, the backbone U.S. economy. The U.S. market was also under stress amid ongoing Trump impeachment public soap-opera, being televised live, damaging and negative for Trump’s approval rating and re-election prospect in 2020.

Dow was already under stress Monday on a report that there is serious disagreement over Trump tariff removals between U.S.-China. On mid-Tuesday, Dow got some boost after a news headline suggested that U.S. and China may agree to phased tariff removals in line with a failed deal in May. But Dow soon slips after the fine prints suggested deadlock over the same and fading probability of Phase Two deal with a U.S. intention to ‘structurally change’ China.

The report said:

China and the US are discussing linking the size of tariff rollbacks to the preliminary terms set in the deal that failed in May. The White House is still debating the precise percentage internally but a deal would at least include removing the Sept tariffs and eliminating the planned Dec tariffs. China has demanded that all tariffs imposed after May be removed immediately and those from beforehand be lifted gradually.

The duties under discussion for a potential rollback include the initial tariffs on some $250 billion in Chinese goods that President Trump imposed last year. Some of his advisers had been pushing to keep those in place longer-term, to ensure China lives up to its end of the bargain, but now are open to a partial relief in order to get the phase one deal signed.

The U.S. officials have differing views on how many phases one would cover and what portion of the tariffs the Trump administration should agree to roll back. The internal figure under discussion ranges from around 35%, pushed by the USTR Lighthizer to the 60% that Trump has said the deal encompasses. Once both countries have settled on a number, either the tariff rate could be lowered by the agreed-upon percentage or tariffs could be eliminated based on that figure.

Some of the $250B in tariffs imposed in 2018 are under consideration to be rolled back and that opposition to the move has softened. Overall the White House is now looking at the tariffs holistically and debating whether to remove them somewhere between 35% and 60%. Those percentages fall in line with what percentage of the overall deal Phase One accomplishes. For reference, the U.S. currently has tariffs on $360B in goods. That number was $250B before the May talks fell apart. On May 10, the U.S. also raised the tariff rate on those $250B in goods to 25% from 15%. The May proposal is a baseline to work out how much to roll back.

Moreover, on Tuesday, Trump said in a WH/Cabinet meeting with his ministers/officials that without a China trade deal, he will hike tariffs even higher. Subsequently, Dow slips.

Trump said:

“I have a very good relationship with China’s Xi and China is moving along nicely. However, China's going to have to make a deal that I like. If they don't, that's it-- I'm very happy with China right now. They're paying us billions and billions. If we don't make a deal with China, I'll just raise the tariffs even higher”.

Trump also accused the U.S. House Speaker nervous’ Pelosi of holding up the USMCA Agreement as impeachment proceedings against him go on: “I think the woman is grossly incompetent. All she has to do is put it up for a vote,” As a reminder, last week, Pelosi suggested a deal with the Trump administration was coming soon, but also pointed out that Trump did not forward him the USMCA bill for passage of the same in the U.S. Congress. The market is concerned that U.S. political duets may eventually cause policy paralysis for the U.S. economy, including China trade deal decisions.

As per reports, citing close Trump aides on trade:

It may morph into something bigger if U.S. President Trump agrees to Beijing’s demands to roll back existing tariffs on Chinese goods. Trump has decided that rolling back existing tariffs, in addition to canceling a scheduled Dec. 15 imposition of tariffs on some $156 billion in Chinese consumer goods requires deeper concessions from China. The president wants the option of having a bigger deal with China. Bigger than just the little deal announced in October.

Whether Trump will agree to remove existing tariffs depends largely on whether he believes it will benefit his re-election chances. Some White House advisers would like to see China agree to large, specific agricultural purchases, while the U.S. maintains existing tariffs for future leverage. That would help Trump’s farm belt constituency while allowing the president to campaign on maintaining his ‘tough on China’ stance, which holds appeal to voters in key states like Ohio, Michigan, and Pennsylvania.

But Beijing is balking at committing here to a specific amount of farm product purchases, within a particular time frame, and wants to let supply and demand dictate deals instead. Beijing also wants Trump to eliminate the 15% tariffs on about $125 billion worth of Chinese goods imposed on Sept. 1, as well as provide some relief from the 25% tariffs imposed on an earlier, $250 billion list of industrial and consumer goods.

In any way, to achieve the $40-50 billion in annual Chinese purchases of American farm goods touted by Trump in October, he would likely have to eliminate all of the tariffs the U.S. put in place since the trade war started in 2018. But Trump and the USTR Lighthizer thought that making such concessions for a ‘skinny’ trade deal that fails to address core IP and technology transfer issues is not a very good deal for Trump, who is the final decision-maker in the U.S. on any deal and hasn’t committed to any specifics so far.

Elsewhere, China’s commerce ministry clearly said a few days ago that removing tariffs imposed during the trade war is an important condition to any deal. The demand has U.S. officials wondering if higher Chinese purchases of U.S. farm goods, promises of improved access to China’s financial services industry, and pledges of IP protection are enough to ask in return for such tariffs removal.

Market Wrap:

On Tuesday, the blue-chip Dow Jones Industrial Average (DJ-30) slips -0.36% to close around 27934.02, near the session low of 27894.52; earlier it made a high of 28090.21 in a day of rangebound trading. The broader S&P 500 (SPX-500) ticked down -0.06% to close around 3120.18; almost at the mid-point of session low-high of 3127.64-3113.47 in a day of rangebound trading. The tech-heavy Nasdaq Composite (IXIC) inched up +0.24% to close around 8570.66, near the mid-levels of session low-high of 8536.73-8589.76 in a day of rangebound trading.

On Tuesday, the broader U.S. market was dragged by China trade-sensitive industrials, materials and energies (lower oil on China trade and supply glut worries) and also by consumer discretionary, consumer staples, communication services, and utilities. The market was helped by financials, healthcare, real estate, and techs. Out of 11-major SPX-500 sectors, 7-were in red. And out of 30-Dow blue-chips, 16-were in green: 3M, Amazon, Cisco, Coca-Cola, Facebook, GS, IBM, Intel, Merck, Microsoft, Pfizer, United Health, Verizon, Visa, and Walt Disney.

On Tuesday, Dow was dragged by Boeing, Apple, Home Depot (earnings and guidance miss), Chevron, Exxon Mobil, while SPX-500 was also undercut by Kohls (earnings/guidance miss). Nasdaq was boosted by chipmakers led by an upbeat report card from AMD.

Boeing was under pressure after the U.S. the National Transportation Safety Board said Boeing must redesign the engine cowl on all of its 737-NG jets -- a precursor to the 737-Max -- in response to the death of a passenger who was partially pulled through a broken window on Southwest Flight 1380 after a jet-turbine blade snapped, ripping off the cowl, in April 2018. There was also a report that various U.S. commercial airline workers’ unions are now objecting about 737-MAX safety and hesitant to fly the grounded jets again. On Tuesday, Boeing opened higher after receiving an order at the Dubai Air Show from Air Astana for 30 737-Max jets worth $3.6 billion and a separate order for 10 Max jets from an unnamed airline (mystery buyer).

On Tuesday, Trump also hailed Nasdaq and tweeted: NASDAQ UP 27% THIS YEAR ALONE!

On early Wednesday, Dow Future further inched down almost -0.30% on lingering worries about the fate of the U.S.-China Phase One trade deal. On late Tuesday, the U.S. Secretary of Commerce Ross again popped up and tried to look optimistic on China trade deal, but also noted the deal is still a ‘work in progress’ and both are ‘fine-tuning’ the Phase One trade deal.

Ross said in an interview:

“Clearly, we think there's some hope. We are optimistic we can get something done. But when it comes to negotiating with China, they know President Trump means what he says and he says what he means-- Trump is okay either way if a deal doesn't come together. He likes the tariffs we're collecting. It hasn't hurt import prices -- they're actually down from a year ago -- it hasn't hurt consumer spending, so it doesn't bother us”.

“President Trump is very happy with China right now---however, papering (documenting) of the deal is very important because it means the details were nailed down. Thus we should not prejudge the deal while it's still being worked on. And if our negotiators felt there was no hope, they would have stopped. If no trade deal is agreed upon, President Trump will go forward with the scheduled Dec. 15 tariffs”.

The overall risk-on sentiment was also affected after U.S. Senate passed a bill backing HK protesters. The U.S. Senate; i.e. the upper house of Congress unanimously approved the ‘Hong Kong Human Rights and Democracy Act’ which would require the region’s special trade status with the U.S. to be reviewed every year. If signed into law, the legislation would also sanction Chinese officials found to be undermining the ‘pro-democracy’ protests in Hong Kong. The bill will now be handed to the House of Representatives for a vote, and if passed, will be sent to President Trump to sign it.

As a pointer, on Tuesday, the U.S. Secretary of State Pompeo said Washington is ‘gravely concerned’ about the unrest in HK, which is China's special administrative region and urged China’s CPC to deal the HK situation very carefully.

Meanwhile, China's Foreign Ministry strongly criticized the U.S. for ‘making irresponsible remarks’ about the protests in Hong Kong and ‘meddling in China's internal affairs’. China also strongly condemned the resolution of Hong Kong adopted by the US Senate and vowed to retaliate if the bill becomes law. The Chinese Foreign ministry's spokesman Geng called on Washington to start respecting China's sovereignty and to stop ‘condoning violent crimes’ by the protesters. He also added that China supports Hong Kong's government in its efforts to end the six-month-long protests and restore order in the special administrative region.

Again on early Wednesday, China’s twitter proxy on trade/cold war with the U.S. (Trump), the influential GT editor Hu tweeted against Trump’s Tuesday comments of substantial tariffs hike under no-deal scenario: Few Chinese believe that China and the US can reach a deal soon. Given the current poor China policy of the US, people tend to believe the significance of a trade deal, if reached, will be limited. China wants a deal but is prepared for the worst-case scenario, a prolonged trade war.

On HK, China’s twitter proxy Hu also warned U.S. against aby interfering and tweeted:The US has turned HK into the focus of China-US competition. It's all the people in Hong Kong, including foreigners and foreign companies that suffer. The mainland only feels limited pain. Beijing has no reason to back off on the issue of sovereignty, and let HK be at US' disposal”.

But the overall risk trade sentiment was also supported by China’s monetary stimulus, although very small in size, but incremental and targeted. On early Tuesday, the PBOC cut the one-year loan prime rate (LPR) by -0.05% points to 4.15% in November and also the five-year LPR was lowered from 4.85% to 4.80%.

Also, upbeat report card from Target and Lowe’s is supporting the risk sentiment to some extent early Wednesday.

Bottom line:

Overall, Trump will use his China trade war ‘policy tool’ very efficiently to ensure an elevated Dow, dovish Fed, anti-China nationalist image for election gain in 2020. And we may see further trade negotiations in Dec/Jan with a postponement of Dec 15 additional Trump tariffs for a high probability of signing the Phase One trade deal with China in Feb.

As a pointer Trump may have called Fed Chair Powell on Monday to have a grasp of Fed thinking about future rate cuts if he goes to signing a tentative trade deal with China in the days ahead. As no President would like to face a general election in the backdrop of a looming economic recession, as a safe strategy, Trump will go for the Phase One China trade deal with some existing tariffs rollbacks as per Chinese demand.

China also knows that Trump is now under great pressure amid lingering impeachment probe, being televised live ahead of the 2020 election. And being Dow savvy, Trump also can’t afford no-China trade deal. In fact, Dow is now China’s biggest leverage in the Trump trade/cold war.

But as such Phase One trade deal may not remove the original Trump tariffs of around 15-25% on at least $250B of Chinese goods, mostly industrial in nature. Thus such trade truce may not remove the tariffs burden and business uncertainty fully and also may not help the global economy significantly to come out of the synchronized slowdown Also, despite Trump’s rhetorics, any official trade deal, interim or final, has to be approved by the now DNC controlled U.S. House and if Trump goes for higher concessions, Democrats led by Pelosi & Co may not approve the deal, which may give Trump a political mileage ahead of the 2020 election.

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

Technically, whatever may be the narrative, SPX-500 now has to sustain over 3145 for a further rally to 3165/3200*-3230/3255* and further to 3285/3305*-3330/3350* in the near term (under bullish case scenario).

On the flip side, sustaining below 3135, SPX-500 may fall to 3095/3070*-3050/3025* and further to 3005/2985*-2960/2920* in the near term (under bear case scenario).

Technically, whatever may be the narrative, DJ-30 now has to sustain over 28350 for a further rally to 28615/ 28800-28955*/29100-29300/29555* in the near term (under bullish case scenario).

On the flip side, sustaining below 28300-28250 DJ-30 may fall to 28150/28000*-27700*/27500 and further to 27300*/27000-26700/26550* in the near term (under bear case scenario).

Technically, whatever may be the narrative, NQ-100 now has to sustain above 8405 for a further rally to 8455/8510*-8575/8645 and further to 8705/8795-8880/8925* in the near term (under bullish case scenario).

On the flip side, sustaining below 8385, NQ-100 may fall to 8275/8220*-8120/8050* and further to 7955*/7895-7800/7700* in the near term (under bear case scenario).

 

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