Why Did Markets Respond This Way to China Trade News?
It’s a commonly held belief that two of the primary hurdles for equity markets this year have been rising interest rates and the ongoing trade battle with China. The last couple of weeks we’ve seen some significant movement in both of these themes yet stocks haven’t reacted as expected.
The progress made with China was in major focus after the G-20 meeting when it was announced that both sides were willing to call a temporary truce to facilitate negotiations. Stocks loved the news, for a few hours anyway. Reality set in when it became apparent that setting the table for a negotiation is not the same thing as a resolution.
Loving and Hating the Trade Truce
In the weekend following the news, while markets were closed, we received a mixed interpretation of the China news from various news outlets. Depending on who you believed you could have gone into the Sunday night futures opening thinking that markets may love or hate the news. As it turned out, stocks initially loved the news but bonds were close to neutral.
This is significant in that there is a belief that stocks are more subject to swings of emotion and the bond market moves are based on the logic and reason of the “smart money.” The most important takeaway from the movement in stocks was that it failed to take out the previous highs made on November 8 and October 17. The failure at these levels appeared to fuel a rapid disappointment that turned into a market route.
More Substance, Less Style
The fact that news of a temporary trade cease fire coupled with a slightly more dovish Fed couldn’t push stocks out of the current range is telling and it means a few things. Number one on the list is that markets are at a point where they want less style and more substance. In short, the news wasn’t good enough. This means that the next leg higher needs a firm belief that there is a real resolution near. Gentle words are not an acceptable alternative any longer.
The good news is that the trading and investing world will know when the story is compelling based on the movement of S&P futures. I believe that a settlement above those highs I mentioned before (2825) is the indication that the fundamental story has been blessed by the market world. Until this happens I will trade with an underlying neutral to negative bias.
Is there a path to new highs that doesn’t include a China resolution? I think yes and it revolves around a more dovish Fed combined with a belief that the macroeconomic picture is still improving. Those two things usually don’t exist together unless the Fed is trending toward a misguided over-emphasis of macroeconomic risks.
The China truce has been set for 90 days to allow for negotiations. Yes, the stocks will react to leaks and the bonds will yawn and wait and the smart trader will monitor movement in both markets in an attempt to judge the validity and importance of breaking news. In the end it will be the strength of the follow-through market movement that will signal if the long period of volatility is nearing an end.