The European market (Stoxx-600) closed around 358.64, slumped by almost -0.70% on renewed US-China trade tensions as Trump called himself a “tariff man”. Dow slumped on confusions about US-China trade truce details, some contradictory statement between the two countries and worries of an economic slowdown as bond yield curve inverts.
The US market is also under pressure after hawkish comments from Fed’s “neutral guru” Williams (NYSE:WMB), signaling “gradual rate hikes” even in 2019 and Kudlow’s comments about Chinese auto tariffs. Trump’s approval of the USTR Lighthizer as the chief China trade negotiator is also worrisome as he is a known China and policy hawk and China will be also not comfortable in Lighthizer.
Also, the defeat of Theresa May in the British Parliament over the vote in “contempt of parliament” has affected the overall global risk-on mood along with another geopolitical headwind that the US has threatened Russia over INF treaty.
European stocks were down as losses in techs lead the overall market lower led by Apple (NASDAQ:AAPL) as one of its suppliers Cirrus issued guidance warning as it cut its Q3 revenue estimate on flagging iPhone sales. Chipmakers were also in stress on confusions about a real China trade deal.
But, losses in the European market were limited as energy stocks rose with oil surged earlier at a 1-week high. Oil got a boost ahead of OPEC+ 2-day meeting in Vienna on 6-7th Dec, when the cartel is expected to announce oil production cuts around 1.4 mbpd.
In a series of tweets on early Tuesday, Trump clarified some aspects of his “handshake” trade deal with the Chinese President Xi, calling himself a “tariff man”:
“The negotiations with China have already started. Unless extended, they will end 90 days from the date of our wonderful and very warm dinner with President Xi in Argentina. Bob Lighthizer will be working closely with Steve Mnuchin, Larry Kudlow, Wilbur Ross, and Peter Navarro.....”
“......on seeing whether or not a REAL deal with China is actually possible. If it is, we will get it done. China is supposed to start buying the Agricultural product and more immediately. President Xi and I want this deal to happen, and it probably will. But if not remember ...”
“....I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN”.
“.....But if a fair deal is able to be made with China, one that does all of the many things we know must be finally done, I will happily sign. Let the negotiations begin. MAKE AMERICA GREAT AGAIN!”
Thus Trump is not so much confident about a real China trade deal and in any case, Trump may not go for the 25% China tariffs rhetorics and will eventually extend his 90-days narrative to another 180-days, but he will also not undo the 10% China and other tariffs like on imported metal because he is balancing the fiscal math (revenue loss) for his tax cut from the tariffs without hurting the US consumers so much as Yuan has been devalued and USD got strength to neutralize the overall impact of 10% Trump tariffs. Trump’s strategy is working fine as in the last few months; the US customs revenue soared.
Before Trump’s tweets, the risk-on trade already came under stress as the White House CEA/NIC Kudlow confirmed that if a deal is not reached with China within 90-days, then the trade-war will re-escalate: “If a deal with China is not reached then the US would increase tariff rates to 25%, and Washington could add to that”.
On Trump’s confusing Sunday tweet regarding lower auto tariffs by China on cars imported from the US, Kudlow clarified that the White House doesn’t yet have a deal with China to reduce tariffs on the US-made cars: "I think it’s coming, OK---(but) It hasn’t been signed and sealed and delivered yet. But, car tariff issue with China will be a litmus test for trade relationship”.
Elsewhere, the US Treasury Secretary Mnuchin said on China trade truce: “We cannot accomplish everything in 90-days but these will be real agreements with the two countries”. But he warned about “penalties” if China doesn't meet timelines, commitments.
On the US bond yield curve inversion, Mnuchin blamed the underlying technical issues – not necessarily the economy -- are impacting supply and demand for securities (Treasuries) and he is also keeping a very close eye on the US markets, and said they are not a good gauge for the economy, quite contrary to his boss Trump. Mnuchin said: “I’ve never believed that markets are efficient. Markets move too far in both directions. It is important to take this information in, but I don’t see the market being an indicator as the future of the economy”.
Mnuchin also does not see the market being an indicator of interest rates, even after the US yield curve inverted for the first time in over a decade. As a pointer, the yield curve inversion has been viewed as a bellwether for an economic recession because it means the interest rates on long-term bonds is lower than the rate on short-term bonds. But Mnuchin said underlying technical issues are impacting supply and demand of Treasuries and he sees an overall strong economy even though housing is one area of weakness.
Mnuchin added: "I think the two most important metrics are the GDP (gross domestic product) numbers and the inflation numbers. I think what we are focused on is having strong growth while we keep inflation in check. I think the fact that the oil prices have come down recently... I think the fact that you see inflation hovering below 2 percent — so below the Fed target is a good thing for growth”. Mnuchin expects sustained GDP of 3% within the next year.
US 500
The SPX-500 future is currently trading around 2715, plunged by almost -2.70% and so far made a session low-high of 2702.12-2789.75. Banks and financials are leading the decline amid fall in bond yields and inversion, negative for their business/lending model. Almost all the major 11-SPX-500 sectors are in red except bond proxies like utilities. Industrials and techs tumbled led by Boeing (NYSE:BA), Caterpillar (NYSE:CAT), and Apple.
Pivot: 2815 Support: 2775 2700 2680Resistance: 2835 2875 2895 Scenario 1: STRONG ABOVE 2815 Scenario 2: WEAK BELOW 2800-2775/2750 Comment: NEAR TERM RANGE: 2625-2815
Boeing
Boeing, the single largest US exporter to China contributed almost 50% of Dow’s gain on Monday. Presently it’s trading around 344.95, plunged by almost -4.17% and so far made a session low-high of 341.74-358.26 as US-China temporary trade truce optimism fades on various confusions and the reality of ensuring a real trade deal by 90 days from 1st December’2018.
In Q3, China contributed $4.68 billion, or 31%, of total commercial airplane revenue of $15.28 billion, which was Boeing's biggest segment with 63% of total revenue of $25.15 billion. In addition to China trade factor, Indonesian “Lion Air” accident because of a new key technical aspect of Boeing and the subsequent regulatory probe has also affected the stock and in the last two months it lost around -7% and outperformed the market (Dow) on hopes of US-China trade truce.
Pivot: 360 Support: 340 325 314Resistance: 375 395 415 Scenario 1: STRONG ABOVE 360 Scenario 2: WEAK BELOW 358 Comment: NEAR TERM RANGE:295-375
USDJPY is currently trading around 112.65, plunged by almost -0.90% on US yield curve inversion and on risk-aversion as Dow plunged almost 700 points (and counting). USD plunged despite some hawkish talks from Fed’s Williams, seeing “further gradual hikes” over the next year or so as the US economy and the labor market is incredibly strong.
Pivot: 112.25 Support: 111.8 111.25 110.3Resistance: 113 113.85 114.25 Scenario 1: STRONG ABOVE 112.25 Scenario 2: WEAK BELOW 112.00 Comment: NEAR TERM RANGE: 111.35-114.25
Gold
In commodities, gold (Feb-19) is currently trading around 1247, surged by almost +0.56%, at multi-month high as the US dollar index slumped. But the overall rally in gold is limited despite the threat of higher inflation, lower growth; i.e. stagflation and a plunging stock market as Palladium is steadily overtaking gold in uses of industrial metals such as catalytic converter of automobiles and medical instruments.
In fact, Palladium has overtaken gold for the 1st time in the history as spot Palladium soared an all-time high $1239.50 on Tuesday amid China auto trade truce optimism tweet by Trump, which could support the demand of Palladium in an auto catalytic converter (anti-pollutant). Palladium has gained almost 50% since mid-August. 
Pivot: 1250 Support: 1225 1210 1200 Resistance: 1265 1280 1295 Scenario 1: STRONG ABOVE 1250 Scenario 2: WEAK BELOW 1245 Comment: NEAR TERM RANGE: 1200-1245