The US stock market (Dow Jones) plunged over 300 points Tuesday on US-China trade truce/war suspense and the concern of global growth. Dow plunged over -450 points on a report that the US has turned down preparatory trade talks with China. This is contrary to last week’s trade truce progress reports and Trump’s own statement that trade talks with China are going very well. On Saturday (19th January), Trump said that “things are going very well with China and with trade and a deal could very well happen by the March 1 deadline”.
Overall, the risk-on sentiment was also under stress on IMF downgrade of global growth and China’s subdued GDP data for 2018 at 6.6% (released on Monday), the lowest since 1990 coupled with pessimistic economic prospect from world business leaders at the WEF, Davos amid Trump trade war and geopolitical jitters from Brexit to US shutdown. China’s President Xi’s warning to party colleagues/workers about ‘black swan’ and ‘grey rhino’ threats to economic stability, stressing the need to also maintain the political stability also added some fuel to the “doomsday” scenario.
Again on late Monday, Trump tweeted pointing about subdued China GDP growth and pressed for a trade deal: “China posts slowest economic numbers since 1990 due to U.S. trade tensions and new policies. Makes so much sense for China to finally do a Real Deal, and stop playing around!”
In response, China’s state-sponsored media tweeted: “China has hoped to reach a reasonable trade deal with the US. When China's GDP grew at a double-digit rate, we wished China-US relations go well. But if the US forces China to sign an unequal deal, Beijing won’t yield even it is negative growth, let alone 6.6%”.
On Tuesday, there was a report that the US had effectively canceled the next round of US-China trade talks, which were expected to take place between senior officials, including a delegation led by China's Liu He, in Washington on 30-31st January. The report also suggested that China’s President Xi’s negotiators are refusing to alter their long-standing position that foreign companies are not forced to transfer technology to Chinese companies. The US has primarily two objections in the area of lack of progress on force technology transfers (alleged IP theft) and the US demand of potentially far-reaching structural reforms to China's economy.
But soon after the report and the subsequent plunge of Dow, the White House denied the report (trial balloon) and said: “trade teams remain in touch in preparation for high-level talks with Vice Premier Liu He at the end of this month”. The White House source also suggested that talks may still happen over the phone, but the termination of the in-person visit signals that reaching a complete agreement will be difficult. China offered to boost its imports from the US for six years though how any such promise would be enforced remains uncertain.
The risk-on sentiment recovered to some extent along with Dow in the closing session after the White House CEA/NIC Kudlow came to the rescue act late Tuesday and denied the report that Trump admin has canceled planned preliminary trade talks with China set for the week. "The story is not true; there was never a planned meeting”.
Kudlow clarified that “Big meeting with China vice chair in the US at the end of January is still on. But China trade talks have to be in America's interest and fulsome discussion going on now with China on IP matters. I agree degree of difficulty with trade talks and enforcement is absolutely essential in trade talks”.
Kudlow said: “Fulsome discussion ongoing with China in intellectual property matters”. On meetings with Chinese officials, Kudlow says “there are no cancellations, none- zero. Let me just try to put that to rest. The important meeting with Chinese Vice Premier Liu He is still on for the end of the month”. Kudlow also blamed that “the Chinese economy is slumping-the Chinese have been backing off market-based reforms and taking a more statist approach”.
On the US Economy and shutdown, Kudlow said: “It’s growing at 3% plus pace, although it may be debatable as we don't have much data over the last month. We will lose some growth in the accounting as a result of the shutdown. But the shutdown is temporary. We will see a snap back after the shutdown is over. With respect to border security and the wall ... we have to solve this- (President Trump is) 100% right. Really the fate of the nation hinges on this”.
Talking about the US shutdown, the risk-on trade as-well-as Dow recovered more in the closing minutes on a report of a possible temporary truce, although no deal is in sight.
As per the report: “Senate leaders reached a bipartisan deal that could reopen the government for a few weeks, allowing the State of the Union address to proceed. The Senate will vote Thursday on two separate bills that would bring an immediate end to the partial government shutdown- one backed by President Trump that includes $5.7 billion for his border wall and another that would simply extend funding for shuttered agencies through Feb 8. Both of these two bills will require 60 votes to advance. The first vote will be on President Trump's proposal to reopen the government, provide $5.7 billion in funding for the border wall and extend legal protections to some immigrants for three years. If that fails, the Senate would then vote on a three-week continuing resolution (CR)”.
As per the earlier China meeting cancellation report: “The Trump admin rejected an offer by two Chinese vice-ministers to travel to the US this week for preparatory trade talks because of a lack of progress on two important issues, highlighting the difficulty that Washington and Beijing will face in trying to reach an agreement by a deadline of March 1. This week’s planned trip by Wang and Liao was intended to pave the way for a higher-level meeting in Washington on January 30 and 31 by Liu He, China vice-premier, and Robert Lighthizer, US trade representative”.
“But the US officials canceled this week’s face-to-face meetings with Wang, a vice-minister of commerce, and Liao, a vice-minister of finance, because of a lack of progress on ‘forced technology transfers’ and potentially far-reaching ‘structural reforms’ to China’s economy”.
“The US negotiators are demanding that Beijing end what they allege are ‘forced” technology transfers’ from foreign companies to Chinese joint venture partners and other firms. They also want President Xi’s administration to scrap state subsidies and industrial policies that they believe discriminate against foreign investors”.
“Trump’s negotiators wanted Liao, one of Liu’s closest aides, and Wang to come to face-to-face talks in Washington with a written offer outlining how Beijing intended to address US complaints about technology transfers and structural reforms. Xi’s negotiators are refusing to alter their long-standing position that foreign companies are not forced to transfer technology to Chinese companies”.
“They also argue that Beijing’s recent offer to improve market access for foreign investors in certain sectors — and strengthen the protection of intellectual property — should address US concerns. While preparations for Liu’s visit to Washington next week are continuing, the Trump administration’s refusal to receive Wang and Liao this week shows how large a gap still exists between the two sides’ positions”.
The report also noted: “Officials at the Chinese commerce ministry could not be reached immediately for comment. USTR declined to comment. The US Treasury has not responded to requests for comment”.
The risk-on trade was already under stress early Tuesday amid renewed US-China cold/trade war tensions. As per reports, the US will proceed with extradition request for the arrested Huawei executive in Canada. The arrested Huawei CFO Meng is being detained on charges related to Huawei "allegedly stealing trade secrets from U.S. business partners, including the technology for a robotic device called "Tappy" that T-Mobile US used to test smartphones”.
The market is concerned that Trump may use the Huawei CFO arrest/extradition as leverage in trade talks, which could infuriate China and pour cold water on the whole story of US-China trade truce progress.
On Monday, the “risk-on” trade was already under some stress on a report that despite growing optimism story about the US-China trade truce progress, on the vital issue of IP protection, there is absolutely no progress as reported by the US Treasury to the US Congress. China officials have denied such IP theft allegation and asked the US for proof.
On Tuesday, when China foreign ministry was asked about retaliation for Huawei CFO Meng, it replied: “China hopes that the US would correct its mistake immediately and what it has done is wrong and Canada and the US will correct their wrongdoing”.
Later on Tuesday, Canada’s foreign minister Freeland clarified: “China’s Huawei tension a central concern for Canada, but the Huawei CFO will be treated fairly in Canada courts. It would be wrong to use Canada legal system as leverage and it’s up to Canadian courts to decide if the US’s Huawei charge valid. But Canada has not pressed the US to drop Huawei case. Canada is to decide on Huawei and 5G in due course”.
On Tuesday, there was another report that Trump is preparing to fill vacant Fed seats (two) with a “dovish candidates” amid a push for low-interest rates. On this Fed/FOMC issue, Kudlow said “It sounds to me the Federal Reserve has come around and will be more patient. I like that word ‘patience’ from the Fed”. Kudlow is clearly happy with Fed’s patience and possible rate hike pause in Q1-2019.
Overall, it seems that Trump is trying his best to pressurize China as per his bellicose trade negotiation stance by floating various China trade war/truce stories. But as a “slave” of Dow, Trump bounds to blink first in his trade negotiations with China although he may be pretending to look hard for the domestic political audience. Trump knows very well that China will never agree to change its reform and industrial policy for the sake of a US trade deal, even if China’s GDP growth goes into negative.
On Wednesday, the blue-chip Dow Jones Industrial Average tumbled -1.22% to close around 24408.48 (-301.87) and made a session low-high of 24244.31-24607.76 in a day of moderate volatility. The broader S&P 500 (SPX-500) crumbled -1.42% to close around 2632.90 (-37.81) and made a session low-high of 2617.27-2657.88 in a day of wild swing. The tech-heavy Nasdaq Composite (IXIC) stumbled -1.91% to close around 7020.36 (-136.87) in a day of rollercoaster trading.
Overall, the US market was dragged by China trade sensitive industrials (Caterpillar (NYSE:CAT), Du-Pont and Boeing (NYSE:BA)), techs, and chipmakers, MNCs, banks & financials (GS), communication services (Apple (NASDAQ:AAPL)), consumer discretionary and home builders (subdued existing home sales data). J&J (NYSE:JNJ), Black & Decker tumbled on subdued guidance. Energies dragged on lower oil amid renewed US-China cold/trade war tensions and IMF forecast of subdued global growth in the coming days. Out of 11-major SPX-500 sectors, except utilities (defensive sector- bond proxies), all closed in the red.
Technical Outlook: SPX-500, DJ-30, NQ-100:
Technically, whatever may be the narrative, SPX-500 has to sustain over 2665 for a further rally to 2695*/2715-2755/2790 and 2825/2875-2900/2945 in the near term (under bullish case scenario).
On the flip side, sustaining below 2655, SPX-500 may fall to 2625*/2600-2565/2545 and 2520/2500-2485/2445 in the near term (under bear case scenario).
Technically, whatever may be the narrative, DJ-30 has to sustain over 24550 for a further rally to 24700/24850-24975/25050 and 25200/25550-25700/25900 in the near term (under bullish case scenario).
On the flip side, sustaining below 24500, DJ-30 may fall to 24300/24050-23900/23750 and 23650/23395-23250/22950 in the near term (under bear case scenario).
Technically, whatever may be the narrative, NQ-100 has to sustain above 6875 for a further rally to 6975/7135 and 7235/7375-7455/7550 in the near term (under bullish case scenario).
On the flip side, sustaining below 6850, NQ-100 may fall to 6750/6640-6600/6550 and 6495/6390-6315/6120 in the near term (under bear case scenario).
US 30
On early Wednesday, Dow future (DJ-30) is currently trading around 24564.00, surged by almost +175 points (+0.70%) on lower USD, upbeat earnings report from IBM (NYSE:IBM) and P&G, renewed hopes of US-China trade truce after Kudlow clarification and reports of a temporary truce in the US shutdown saga. The risk-on sentiment was further boosted by comments from IMF chief Lagarde that the global economy is not heading into a recession.
Japan on Wednesday reported the biggest slump in exports in at least two years as sales to China, its most important trading partner, fell 7% in December. That was followed by a cut in inflation forecasts for the BOJ and a pledge to keep 10-year bond rates at 0% in order to stoke inflation and prevent the world's third-largest economy from tipping into recession.