Flipping the Switch: Investors Return to Optimism Ahead of Trade Talks

Investors are once again more optimistic ahead of high-level trade talks that start tomorrow after Bloomberg reported that China is still open to a partial trade deal and a Financial Times article said the Asian nation has offered to boost its yearly purchases of U.S. farm products.

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5 min read
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Key Takeaways

  • China reportedly open to partial deal, buying more farm products

  • Fed to start expanding its balance sheet again

  • Central bank scheduled to release minutes from Sept. meeting later today

(Wednesday Market Open) And the seesawing continues.

After taking it on the chin yesterday amid a flurry of discouraging news on the trade front, fresh headlines on U.S.-China relations are helping push the market the other direction this morning.

Investors are once again more optimistic ahead of high-level trade talks that start tomorrow after Bloomberg reported that China is still open to a partial trade deal and a Financial Times article said the Asian nation has offered to boost its yearly purchases of U.S. farm products. 

While the reports seem to be cheering Wall Street, President Trump has said in the past that he’s not inclined to agree to a partial deal with China, and Beijing’s promise to buy more agricultural products echoes its position that we’ve heard before. We’ll have to see how things shake out later this week during the trade negotiations in Washington, but big issues including intellectual property rights and technology transfers still seem to loom large.

Amid a lack of other major financial or economic news, trade headlines tend to move the market, and today’s are being viewed positively. If you’re a longer-term investor, this week’s back-and-forth action could be a good reminder to remember your investment time frame and ignore the headline noise. 

Headlines Driving the Market

This morning’s market action is a reverse image of yesterday’s, which had investors seeing red as equities stumbled amid headlines that included news that the U.S. Commerce Department added 28 Chinese firms to its export blacklist and that the U.S. State Department would slap visa restrictions on some Chinese officials. Both moves were in connection with alleged abuse of Muslim minorities in the western region of Xinjiang. 

Meanwhile, Bloomberg reported that the Trump administration is moving ahead with discussions about possibly restricting funds moving into China, and the South China Morning Post said the Asian nation is dialing back its expectations ahead of this week’s high-level trade negotiations. 

None of the S&P 500 Index (SPX) sectors were unscathed, and all finished in negative territory, even traditionally defensive Real Estate, which couldn’t manage to hold onto its intraday gains. 

Financials led the decline, with a drop of more than 2%, and eight other sectors registered declines of more than 1% as investor angst about the trade situation ratcheted up once again. Trade-sensitive stocks such as semiconductor equities, Apple (AAPL) and Caterpillar (CAT) took a beating like a rented mule as they derive a significant portion of their revenue from China.

One bit of the market that wasn’t in the red was the Cboe Volatility Index (VIX). Wall Street’s main fear gauge shot up more than 13% to head north of 20 once more as the string of headlines threw cold water on optimism about the trade talks between the world’s two largest economies. 

In a broader sense, it seems that the market may have taken Tuesday to re-evaluate expectations about the trade situation but this morning might be thinking the selling got overblown. Still, it’s possible that investors and traders are thinking that this round of negotiations could go the way of previous talks and end up being just, well, talk. 

More Dovishness From Fed?

Until we see some concrete progress indicating that the logjam is breaking up and that the two sides are able to move past their differences, it seems likely the SPX may continue having trouble moving much past 3000.

But an encouraging note is that the market’s downside seems to be kept in check as well. The U.S. economy remains the best game in town when compared with China’s or Europe’s, and the Federal Reserve seems open to continuing its dovish trajectory.

On that front, Fed Chairman Jerome Powell said in a speech on Tuesday that the central bank will soon expand its balance sheet. While he said the move won’t be a resumption of large-scale asset purchases known as quantitative easing, the market seemed to take it as a positive sign.

The Fed might offer up more clues as to its thinking regarding rate cuts and asset purchases—or at least what it was thinking during the September 17-18 meeting—when it releases the minutes from that meeting this afternoon. Recall the meeting took place in the early days of a spike in overnight lending rates and Fed participation in the repo market.  

FIGURE 1: OIL SLIPS. It's been less than a month after a drone strike knocked out a chunk of Saudi oil infrastructure, sending crude oil futures (/CL) briefly above $63 per barrel, and it's been pretty much straight down since then. Crude fell again Tuesday, dipping below $52. Investors and traders appear to be concerned about slowing demand for black gold amid a weakening global economy and a prolonged trade war between the U.S. and China. This morning, raised hopes for trade progress seem to have given crude a bit of a lift.Data source: CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

A Slippery Slope: One reason why oil prices have been generally stuck in the mid-$50s per barrel is the strength of the U.S. dollar. Because oil is denominated in dollars, a stronger buck makes the commodity more expensive for holders of other currencies. That can dampen demand. With the greenback near its highest point since 2017, it’s unsurprising that black gold had trouble staying above $60 recently, especially as the trade war has caused concern about demand for oil amid faltering global economic growth. 

The trade war and global growth concerns are among the reasons why the dollar is so strong right now. The U.S. is seen as doing relatively well compared to other parts of the world, and some investors have been wanting the relative safety of the greenback. And although the Fed has been cutting rates, they’re still higher than in other parts of the world, also keeping demand for the dollar higher. That last bit seems to be changing, though, as the Fed has been cutting rates and is now embarking on adding to its balance sheet once again. More dovishness from the Fed could weaken the dollar and help give oil prices a leg up. 

Their Ship Has Come In: Even though oil futures have been pulling back and the trade war is helping cause concern about future demand, companies that ship oil have been doing pretty well. It seems that shipping rates have been climbing as capacity is constrained. The crude oil shipping industry has been rightsizing its fleets even as global regulations have required getting rid of antiquated ships. And increased refinery production of low-sulphur fuels and the drone attacks on Saudi Arabian oil infrastructure have created additional demand even amid the reduced supply of new vessels, according to crude shipper Nordic American Tanker (NAT). U.S. sanctions on China’s COSCO also appear to be contributing to the capacity tightness. It’s also possible that low oil prices have prompted buyers to stock up, giving shippers an additional lift. 

In addition to NAT, shares of other oil shippers Teekay Corp. (TK), Frontline (FRO), Tsakos Energy Navigation (TNP), Ship Finance International (SFL), and DHT Holdings (DHT) have been up in recent days. NAT rose more than 20% Tuesday after BTIG Research upgraded the stock following a company letter to shareholders noting strong market conditions.  

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • China reportedly open to partial deal, buying more farm products

  • Fed to start expanding its balance sheet again

  • Central bank scheduled to release minutes from Sept. meeting later today

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