Friday Provides a Sign of Relief for Stressed Markets
In spite of an upbeat day on Friday, U.S. stock indices closed the week lower again. The month of May has been turbulent, and concerns about trade only add to this.
Different things affect the stock market in different magnitudes, and there are all sorts of events that shape investor behavior and move the price of stocks. Things like interest rate changes can have big effects upon the markets, where issues of lesser importance may just inspire a blip on the radar and be gone by the next day.
If we didn’t know how much the trade dispute and the potential deal between the United States and China effects stock markets, we have been well reminded of this during the last couple of weeks.
It is as if the market hangs on every word and every expression that may tilt the balance between success and failure, and even the slightest indication of a small probability change has provoked a notable response in the markets.
With events whose influence is clearer and more substantial, like the recent escalation of this trade war, the response from the market is more decisive. This has been the case with recent events where we continue to head lower as more events unfold.
It was looking like the worst may be over for now at least after the market digested the increase in tariffs on both sides. President Trump blocking Huawei turned things in the other direction though, which put into question whether the deal will get done now.
The Chinese have made this issue central to their being willing to further negotiate with the Americans, and for a time at least, this looked like it could kill the deal right there. If Trump would not be willing to retract the sanctions on Huawei, and this lead to China no longer participating, this would clearly put an end to things.
Trump Indicates That This May Just Be a Ploy
After a dismal Thursday, while the market grappled with this new development of the Chinese making this a condition to proceed, markets were buoyed on Friday when the situation took at least a little turn for the better.
The hope here is that Trump is only banning American companies from doing business with Huawei as a negotiating ploy, and he is certainly capable of such a tactic.
If this is on the table, and it certainly is now, this could add to the pressure on the Chinese to reach a deal, and at the very least there is more of an incentive for them to act than there was after Trump’s most recent tariff hike.
Trump has now shared that he is willing to include the removal of this ban in the trade deal, and this does indicate that the ban is more about its use to influence the trade deal than anything. This is the best-case scenario for the bulls, which not only allows for discussions to continue but may even prompt a faster resolution than otherwise.
When items are added to your side in a negotiation, the expectation is that the other side will compensate for it on their side, and the Americans will indeed be looking for something back for their including the ban’s removal in the deal. This surely will not be met without resistance on the Chinese side, but does add to the negotiating power of the U.S. side, regardless of how this all plays out.
Donald Trump does pride himself on being a tough negotiator though, and with him, we see both more negotiating and tougher negotiating. It is not difficult at all to imagine a scenario where Trump cannot be appeased and the deal ends up dying as a result. This is the most likely way it would fail if it does.
We’ll See if This Helps or Hurts Things
Trump didn’t specifically say he’d remove the ban, only that it could be included in the trade deal, but it is unlikely that the Chinese would accept anything less than a removal, so this should not be a concern.
We could call these things the accessories to the tariff hikes, things like Trump’s expressing his pleasure with the tariffs, and his using Huawei as a new bargaining chip. The Huawei ban has real teeth though, and nothing else has come close to upsetting the Chinese as this has. Trump really struck a nerve with this one.
We’ll have to see just how this all ends up affecting the Chinese, whether it will inspire them to relent more toward successfully completing all of this, or whether it served to make a deal less likely by their simply being upset by all of this. Upset negotiators usually dig in, and their digging in would seriously put things into question.
All of this has been accounted for already though. While we ended another week lower than we started it, things were starting to come around a bit before this most recent bump in the road, and how that we are over the bump, we may be in a position to resume this.
The market still remains jittery on trade though, and where we go in the next while may depend on how the trade issue unfolds over the next few weeks or months. A good part of the move up in 2019 has been based upon a positive expectancy of a trade deal, and there is still probably a lot more downside if the deal fails to be achieved.
We’re still at a low point though, and no talks are scheduled, although the Chinese have expressed their willingness to resume them. Things are still in a holding pattern, although as we have seen, things can change pretty quickly.
Editor, MarketReview.com
Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.
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