As Friday progressed, Steve Mnuchin’s “constructive” assessment of the talks was yet another attempt to fool the algos one more time to chase the market into the close as futures closed up on the day with hope that a deal would still be reached. Wishful thinking. One can forgive the algos (“machines”) for being duped, as clearly they have no cerebral tendencies nor any perceptive skills whatsoever to read between the lines.
One wonders if humans can be ruled out altogether when it comes to investing and trading — there is still room for active management! It just takes a bit more time, patience and capital, as regrettably so much capital lies in the hands of these algos that chase trends, exacerbating the moves in either direction. However, if we (humans) get it right, the unwind can work out to be even more lucrative.
The talks ended with no agreement. Trump decided to hit the media with claims that it was “China who broke the deal,” with further totally unfounded sensationalist comments that “we are happy collecting tens of billions of dollars from China,” when clearly the man has no concept of economics or how trade tariffs even work. And this is the President negotiating, ouch.
Trump’s own economic adviser, Larry Kudlow, rejected Trump’s narrative, saying that U.S. companies and U.S. consumers would end up paying the tariffs, as the companies would pass on the higher prices. So, thank you Trump for Making America Great Again! He even echoed a plan to redirect the money collected from tariffs and redistribute to the starving people in the world — another nonsensical idea that was later criticized.
The S&P 500 is down only 3% since the highs reached in April, with the Nasdaq down 3.3% and Philadelphia Semiconductor Index down 6%. After a few more angry Trump tweets over the weekend, the Chinese State-owned Global Times reported “the fierce U.S. offensive” as irrational and hurtful to the U.S. economy.
It is yet unclear how China will respond. As the market awaits this, what they fail to see is how the yuan is weakening even more, down nearly 1% today at 6.90 vs. the dollar. Anyone remember the key 7.0 vs. the dollar psychological level that can cause widespread contagion recession worries?
China is very silently devaluing its currency in the background, which will make the tariffs meaningless to Chinese as they offset the increases in tariffs. This will further anger Trump, who cannot bear to see China not “giving in” to his demands. And why should they? China is not afraid to fight and will never stand anyone dictating their domestic policy.
No further talks are scheduled, but Trump and Xi Jinping will probably meet during the G-20 meeting in Japan towards end of June. A lot of carnage can happen to the markets over that timeframe. Most FOMO (fear of missing out) investors who got sucked into the market in April after missing out on the first-quarter rally are still holding on as they “hope” for a deal — blissfully oblivious.
The backdrop is simple. Global growth has been slowing. With the market at its highs, the Fed will continue its patient stance. We know their trigger point is around 2400 on the S&P 500. Trump has one agenda: get the market higher by 2020 and get re-elected. The only way to do that is to show to the American people how he got them out of a recession and stood up to China. Yes, the public is that naive.