Much ado about nothing

Much ado about nothing. Stocks surged yesterday on positive trade news and more strong employment figures.  Investors remain bullish about trade but wonder when a deal will actually happen.




  1.  Stipulations?  Negotiations between the US and China have been going on for some time with many ups, downs, starts, and stops.  So where are we… really?  First and foremost, the trade war is exacting financial pain on both the US and China.  Tariffs have begun to eat into corporate profits and supply chains have been disrupted world-wide.  The trade spat was started to push China to reform its intellectual property practices, forced tech transfers, illegal subsidies, and currency manipulating.  Seems like a worthwhile campaign but a costly one, which may not ever yield the desired results.  During the course of the battle, both sides have exacted tariffs on each other’s goods, China has manipulated its currency, China has reduced purchases of US agricultural products, and the US has made it illegal for US companies to do business with certain large Chinese companies hurting profits.  Chinese economic growth has slowed and US companies are feeling the pain, so both sides have an incentive to end the fight.  Negotiations have been taking place throughout the duration of the trade war and investors have been able to glean very little about the progress of the talks.  Tweets from the President and cryptic comments from both sides have sent markets up one day and down the next.  Finally a few weeks back the administration announced something tangible: a phase one trade deal.  Markets rejoiced sending equity indices to new highs on optimism.  Soon after, with still very few details about the contents of the deal, investors began to worry if the deal would ever be signed.  A cancelation of the APEC summit in Chile where the two sides aimed to sign a deal, though unrelated, put a little fear into investors.  Still, investor sentiment appears to be pointing to a success.  In yesterday morning’s note, I reported that a Chinese official announced that the two sides would remove existing tariffs as part of a deal.  The news became the primary driver for yesterday’s sharp move in equities and a precipitous drop in bonds.  But as the session wore on, details of the tariff roll-back became murkier.  What we learned is that the two sides agreed to roll back tariffs proportionally IFan agreement was reached.  What does that mean?  Of course we expect tariffs to go away if a trade deal is reached, but when?  As usual, we have very little clarity on the matter and when Administration officials were questioned they responded in the same cryptic fashion as they have throughout the negotiations.  We remain with only one fact: both sides are talking and they appear to want to make progress.  Progress is good and it was enough to propel stocks to new highs once again yesterday.  At some point however, the market will demand a real deal, or at least some real facts… no stipulations.


  1.  Bonding time.   Bonds have had an interesting twelve months, rising almost as much as stocks.  Typically stocks and bonds trade in opposite directions but these past twelve months have proven that the only certainty in markets is uncertainty.  Still, with both asset classes rallying together, investors benefited.  Bonds have essentially rallied as global economic data worsened, pointing to a slowdown and potential recession.  Stocks, undaunted by these same facts, also rallied through the same period leaving many industry professionals wondering which side was right.  This is one of the primary drivers of what I have been calling “the most hated rally” in my notes.  A new theme is beginning to emerge however.  Starting in late July with the first of the Fed rate cuts, bonds rallied further with 10-year treasuries ultimately hitting all-time low yields of 1.45%.  The Fed’s September rate cut sent yields abruptly higher as investors began to believe that the easing would help turn the economy around.  In the aftermath of the move, bond yields slipped once again as trade fears took hold.  Finally, when the Phase One trade deal was announced and the Fed lowered rates for a third time, bond investors became convinced, once again, that the future looked brighter and sent yields higher.  Yesterday, 10-year treasury yields jumped by as much as +13 basis points in intraday trading in response to the positive trade news.  Yields ultimately settled at 1.92%, up +9 basis points.  The move will once again cause traders to question which side is right.  With the S&P500 yielding 1.87%, bonds may start to look attractive once again.




Stocks were in rally mode yesterday in response to positive news on trade negotiations.  The S&P500 climbed by +0.27% to a new high, the Dow Jones Industrial Average traded up by +0.66% to a new high, the Russell 2000 advanced by +0.28%, and the NASDAQ Composite Index went up by +0.28% to a new high.  Bonds fell and 10-year treasury yields rose by +9 basis points to 1.92%.  The trade optimism led to a -1.48% drop in Gold and a +0.20% rally in the Dollar Index.  Crude oil also rose on trade hopes climbing by +1.42%.




– Preliminary University of Michigan Sentiment is expected to be 95.5, same as last month.  Pay attention to the headline number as well as the secondary Current Conditions and Expectations indices.

– San Franciso Fed President Mary Daly, New York Fed Presdient John Williams, and Fed Governor Lael Brainard will all speak today.

– Duke Energy will announce earnings before the bell.


Have a great weekend!

daily chartbook 2019-11-05


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