The US stock market (Dow) slumped over 100 points Thursday on terrible retail sales and reports that the US-China is far apart on structural reform deal. There was also a report that the US-China talks are ‘deadlocked’ over structural issues (‘Made in China 2025’, alleged IP theft and forced tech transfer). Dow plunged almost 235 points mid-Thursday but recovered to almost flat on another report that Trump could withdraw his 10% China tariffs (after horrible US retail sales). Also, the market was helped by Kudlow jawboning and hopes of ‘Trump shutdown’ deal after Trump tweeted that he is ‘reviewing’ the funding bill with his team at the White House.
There was a report that although there are still large differences with the structural issues with China, Trump could drop his 10% China tariffs as a good gesture. But eventually, Dow again slips in the last hour of trading on another report that although Trump will sign the bipartisan border deal accord to avert another government shutdown (and fall of his approval rating), Trump could simultaneously announce a national emergency over the border issues.
As per reports, the US President Trump will sign a spending bill to keep the US government open, but also plans to declare a national emergency to bypass Congress and secure funding for his border wall, Mitch McConnell, the Senate majority leader, has announced: “I had an opportunity to speak with President Trump and I would say to all my colleagues, he has indicated he's prepared to sign the bill. He also will be issuing a national emergency declaration at the same time. I indicated I’m going to support the national emergency declaration”.
Later the White House spokesperson Sanders confirmed that Trump will sign the bill that averts another government shutdown. However, as the bill doesn’t include the full sum of the funding that Trump demands the border wall, he’s going to declare a national emergency.
Sanders said: “President Trump will sign the government funding bill, and as he has stated before, he will also take other executive action — including a national emergency — to ensure we stop the national security and humanitarian crisis at the border. The President is once again delivering on his promise to build the wall, protect the border, and secure our great country”.
Elsewhere, top Democrat in the Congress and the House of Representatives Speaker Pelosi said she might file a legal challenge to Trump’s action as this is not a national emergency situation at the US southern border and “that’s an option”. The US Senate Democrat leader Schumer also criticized Trump of “gross abuse of the power of the presidency”.
As per reports, Trump will “dig out” around $6.6B from unspent Pentagon and other Federal agencies’ fund and together with the Democrats approved border wall “down payment” of around $1.38B, Trump may spend almost $8B on 200 km southern border wall. This is higher than prior Trump demand of $5.73B as now “cost escalated” by almost 40% in the last few months, far more than the US inflation!!
Although the market is relieved that at least there will be no government shutdown, causing loss of US GDP. the market is also concerned about the ongoing US political jitters and the resultant policy paralysis at the White House apart from surging US fiscal deficits and debts, which is now almost around $21T.
Talking about Trump’s plan to withdraw China tariffs at 10%, a report said: “China and the US remain far apart on structural reforms like equal market access and intellectual property protection. But despite that, there are positive signs. In the latest round of talks underway in Beijing, both sides also are discussing the possibility of the US' removing the 10% punitive tariffs it has imposed on US$200 billion of Chinese products while leaving the 25% tariffs on US$50 billion of Chinese products unchanged”.
In return, China could pledge to make structural changes that would better protect the intellectual property of foreign companies doing business in China, would expand access to Chinese markets and reduce hefty state subsidies.
The report also suggested: “China is proposing parallel talks aimed at resolving Huawei CFO’s extradition case, but reform verification mechanism could be a stumbling block in ending the trade war. As the US has repeatedly said China does not have a good track record when it comes to implementing its commitments and its reluctance to trust Beijing has left the countries far apart in their negotiations”.
The report also added: “The US delegation has repeatedly insisted that any deal on structural reform must be verifiable and monitored. Under a verifiable mechanism, if China failed to deliver on its promises by an agreed period, the US would immediately impose or raise the tariffs on Chinese products. Beijing, however, has used the softer phrase ‘implementation mechanism’ to describe the framework for monitoring China’s actions and resists the idea of giving the US power in this regard. China refused to accept an overhaul of its economic model as a condition for proving its commitment to reform”.
The report further said: “Another source familiar with China’s position said it worries that the US would use the verification mechanism to make additional demands on the technology front, which is at the center of a growing rivalry between the two countries.
The US retail sales for December plunged to -1.2% from prior +0.1% (revised downwards from +0.2%), lower than the expectations of +0.1% sequentially (m/m). The US core retail sales tumbled -1.8% from prior +0.2%, lower than expectations of no growth at 0.00% on a sequential basis.
The horrible fall in monthly retail sales in December is the biggest in the last 10-years (since 2009) and undermining the US economic growth. But this may be also a function of US government shutdown, polar vortex and higher cost of goods as a result of Trump tariffs. In any way, the market will now focus on the January as-well-as February retail sales data to gauze, whether the December plunge is transitory or the US consumers are really cutting back their discretionary spending amid higher cost of living.
After the horrible retail sales, the White House CEA Kudlow said: “There are `glitches' in retail sales number as it was affected by the government shutdown. I am delighted the Fed is on ‘hold’ and hopefully the Fed will step aside”.
On China trade deal, Kudlow said: “While the US trade negotiators in Beijing are meeting with Xi tomorrow amid a ‘good vibe’, contrary to earlier reports, no decision has been made yet on extending the tariff deadline”. When asked if Trump is considering delaying the deadline, Kudlow said: “no decision has been made, but Xi is due to meet with Mnuchin and Lighthizer on Friday”.
Kudlow added: “I’ve talked to the group (in China). They’re covering all the ground. They’re hard at it. They are going to meet with President Xi, so that’s a very good sign. They’re just soldiering on. The vibe is good. I can’t give you details”.
Kudlow further added: “Negotiators in Beijing are soldiering on and the vibe is good. They are going to be meeting with President Xi tomorrow, which is a very good sign. They are moving through all of the issues. They are getting the job done. I am cautiously optimistic about the outcome of the talks with China”.
After Kudlow’s “positive vibes” and optimism on China trade and terming the terrible retail sales in December as a ‘glitch’, Dow recovered to some extent from its session low of 25308.09 but again slips on another report that the US-China are ‘far apart’ on a ‘comprehensive’ trade deal.
The report said: “In closed-door sessions, the sides have failed to narrow the gap around structural reforms to China’s economy that the US has requested, even as both seek to avoid an increase in tariffs after March 1”. The report also suggested: “The US and China have made little progress so far during trade talks in Beijing, leaving much work to be done before President Trump and his counterpart Xi look to seal a deal at a yet-to-be-scheduled summit”.
Meanwhile, another report suggests China promised to boost chip purchases from the US for a trade deal, which is now deadlocked: “China is counting on promises of big purchases of semiconductors and other goods to ease trade tensions and convince Trump to extend the tariff truce. During the negotiations this week that were in their fourth day Thursday, the US and Chinese officials have remained deadlocked on a number of issues underlying the current trade dispute. These include Washington's complaints that China pressures American firms to share technology and uses industrial policies to favor domestic companies at the expense of the US competitors”.
The report also suggested: “China is proposing increasing US chip sales to China to $200 billion over six years, a five-fold increase. They're also promising to scrap subsidies for domestically made cars. China hopes the pledges are enough to schedule a summit between Trump and Xi, where they will work out the tougher issues”.
The report also said: “The USTR Lighthizer won't like the trade deal proposal, which doesn't address structural issues. Some of China's plans to increase US purchases could also run into trouble with American business groups and companies. The semiconductor plan would require the US companies to rework their supply chains so that chips are shipped directly to China from the US instead of being routed through countries like Mexico or Malaysia, where many semiconductors are assembled and tested, the companies said. The goods would be counted as US exports, rather than, say, Malaysian exports”.
Earlier, Dow future surged by almost 100 points on talks of 60-days extension of Trump’s China ‘deadline’ (temporary trade truce). The ‘risk-on’ trade got a boost in the early Asian session Thursday after a report that Trump is considering a 60-day China tariffs deadline extension, which is set to start from 2nd March’2019.
As per the usual “source-based” report (leaked floating balloon):
“President Trump is considering pushing back the deadline for the imposition of higher tariffs on Chinese imports by 60-days. The president said Tuesday that he was open to letting the March 1 deadline for more than doubling tariffs on $200B of Chinese goods ‘slide’, if the two countries are close to a deal that addresses deep structural changes to China's economic policies, though he added he was not ‘inclined’ to do so”.
The report also suggested “Trump is weighing whether to add 60-days to the current deadline to give negotiations more time to continue. Trump is indeed considering extending the deadline by 60-days, after rejecting the initial request by China for 90-days extension. But a spokeswoman for the USTR Lighthizer declined to comment”.
The much-awaited high-level US-China trade negotiations started in China from Thursday and will continue till Friday, involving the US Treasury Secretary Mnuchin, the USTR Lighthizer, Chinese Vice Premier Liu He and may also include the Chinese President Xi. Ahead of the meeting, Mnuchin said he’s “looking forward to discussions today” describing the overall discussions so-far as ‘good’. Earlier, on late Wednesday, Trump said: “China talks are going along very well and the Chinese are showing us tremendous respect”.
On the other side, China said: “The outcome of the China-US high-level economic and trade negotiations may be related to the future development and stability of the world economy. Both parties hope to reach a mutually beneficial agreement. The best thing we can do now is to let both sides concentrate on consultations”.
The market is quite relieved that the perpetual China “trade consultations” will go on for another 2-months and possibly till 2020, the US Presidential election as China will never compromise on its structural reform such as “Made in China 2025” initiative. China is opening up its economy and various sectors apart from financials and is also taking necessary steps to prevent the alleged IP theft and forced technology transfer. Trump is bound to blink first for the sake of Dow stability, everything being equal and this is now China’s best leverage.
In any way, Trump will also not find enough time to concentrate on China trade deal and meeting with Xi as he is now too much occupied with domestic politics amid US shutdown drama. As per latest reports, Trump will not sign the bipartisan US border wall deal so easily and he will add his “inputs”. Thus a meeting with China’s Xi may happen only in mid-March. As this ‘deadline’ extension report was already anticipated and discounted by the market, the overall “risk-on” sentiment boost was quite limited.
On Thursday, the blue-chip Dow Jones Industrial Average (DJ-30) slumped -0.41% to close around 25439.39, almost at the mid-point of the session low-high of 25308.09-25558.90 in a day of volatile trading. The broader S&P 500 (SPX-500) inched down -0.27% to close around 2745.73, almost at the mid-point of the session low-high of 2731.23-2757.90 in a day of rangebound, yet volatile trade. The tech-heavy Nasdaq Composite (IXIC) ticked up +0.09% to close around 7426.96, near the session high of 7454.42; earlier it made a low of 7375.71 in a day of rollercoaster trading.
On Thursday, the overall US stock market was dragged by retailers (horrible retails sales for Dec), banks & financials (lower bond yields after the terrible retail sales data and the perception that the Fed may cut in Dec rather than hike), consumer staples (subdued report card/guidance warning from Coca-Cola (NYSE:KO)), while helped by techs, chip makers (led by Netflix (NASDAQ:NFLX), AMD, Cisco (NASDAQ:CSCO) and Micron (NASDAQ:MU)) and industrials on renewed China trade truce optimism coupled with energies on higher oil amid reports of Russian cuts and renewed Venezuelan crisis. Lower USD also helped the market. Overall, out of 11-major SPX-500 sectors, 6 were in red. Amazon (NASDAQ:AMZN) slips of NY office fiasco and the decision to cancel the NY 2nd H/Q plans.
Technical Outlook: SPX-500, DJ-30, NQ-100
Technically, whatever may be the narrative, SPX-500 has to sustain over 2755 for a further rally to 2775*/2790-2825*/2875 and 2900/2925-2950*/3020 in the near term (under bullish case scenario).
On the flip side, sustaining below 2745-2720, SPX-500 may fall to 2705/2680*-2660/2635 and 2605/2590-2575/2555-2530 in the near term (under bear case scenario).
Technically, whatever may be the narrative, DJ-30 has to sustain over 25600 for a further rally to 25750*/25900-26100/26300* and 26555/26685-26900/27000 in the near term (under bullish case scenario).
On the flip side, sustaining below 25550, DJ-30 may fall to 25350*/25200-25000/24790* and 24650/24490*-24200/24000 in the near term (under bear case scenario).
Technically, whatever may be the narrative, NQ-100 has to sustain above 7135 for a further rally to 7235*/7375-7455*/7550 and 7685/7735*-7850/7925 in the near term (under bullish case scenario).
On the flip side, sustaining below 7105-7075, NQ-100 may fall to 7000*/6900-6825*/6725 and 6650/6580*-6520/6440 in the near term (under bear case scenario).