Final details of the ‘phase I’ trade deal with China might be disappointing

Commenting on today’s trading in which the trade deal with China was in focus, Gorilla Trades strategist Ken Berman said: Even though the negative news regarding the China tariffs weighed on stocks in the second half of the session, today’s losses were minuscule, especially compared to the gains of the past months. The large-cap benchmarks…

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Commenting on today’s trading in which the trade deal with China was in focus, Gorilla Trades strategist Ken Berman said:

Even though the negative news regarding the China tariffs weighed on stocks in the second half of the session, today’s losses were minuscule, especially compared to the gains of the past months. The large-cap benchmarks closed well below their intraday highs, which now represent their all-time highs as well, but since small-caps were relatively strong for the second day in a row, there is still no indication of an imminent correction.

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Q4 2019 hedge fund letters, conferences and more

The major indices mixed and virtually unchanged following one of the most eventful sessions of the year, so far, due to the start of the earnings season, the busy economic calendar, and the fresh trade-related developments. The Dow was up 32, or 0.1%, to 28,939, the Nasdaq lost 23, or 0.2%, to 9,251 while the S&P 500 fell by 5, or 0.2%, to 3,283. Advancing issues outnumbered decliners by a less than 5-to-4 ratio on the NYSE, where volume was slightly below average. 

While most large-cap banks finished in the green thanks to today’s bullish earnings reports from JP Morgan (JPM, +1%) and Citigroup (C, +1.1%), Wells Fargo (WFC, -5.4%) got smashed lower due to its dismal report. The whole financial sector was struggling as Treasury yields declined, and the market-leading tech sector, and consumer goods lagged the broader market as well. Utilities and real estate stocks enjoyed the lower yields, while services, industrials, and materials trod water in the negative trade-related news.

Banks lead the market

The final details of the ‘phase one’ trade deal with China might end up to be disappointing in light of the upbeat news flow since last month’s announcement. The fact that tariffs on $250 billion worth of Chinese goods and services will likely remain in place for at least ten more months despite the agreement was largely behind the afternoon dip on Wall Street. The tariffs have been clearly dragging the global economy lower, and although the recent weeks saw a positive shift in activity the extended tariffs could mute the recovery.

The exact text of the trade deal with China might be revelaed soon, as according to the latest reports the deal will be signed tomorrow. Volatility could increase substantially should the agreement contain further surprising details, and the Volatility Index (VIX) already jumped higher today due to the incresed hedging activity. There will also be corporate earnings coming out as well, and the numbers of Bank of America (BAC) and United Health (UNH) will likely have the biggest impact on markets.

We will have yet another busy day of economic releases, with a focus on the manufacturing sector and inflation. The Consumer Price Index (CPI) matched expectations today, but since the core CPI missed, tomorrow’s Producer Price Index (PPI) could be in for its third weak month in a row. The Empire State Manufacturing Index missed expectations three times in late-2019, and given the recent domestic weakness in the sector, the expected small uptick to 3.7 might turn out to be overly optimistic. The overnight session will also provide plenty of catalysts, with the British CPI and Eurozone industrial production coming out.

All eyes on China trade deal news

Technical Corner.  Since the major indices all erased last Friday’s dip, it’s no surprise that technicals continue to be bullish across the board, with not a single trend indicator flashing red. The major indices are still well above their rising 200-day moving averages of 8,153 for the Nasdaq, 2,981 for the S&P 500, and 26,817 for the Dow. Despite the late-day pullback, the benchmarks are also north of their steeply rising 50-day moving averages of 3,149 for the S&P 500, 8,682 for the Nasdaq, and 28,024 for the Dow.

While high-yields corporate bonds, as measured by the HYG ETF consistently lagged equities ever since 2014, the bond market might already have started a tectonic shift. The ETF hit a fresh 30-month high this month, after surging higher in December, and it might finally be ready to approach its bull market high back from 2013. While an important technical hurdle, its cyclical high form 2017 is still ahead for ETF, it is trading clearly above both its moving averages, and a technical breakout could give another boost to the bull market in stocks. Stay tuned!

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