WASHINGTON. OK, our headline is slightly misleading. This weekend at the G20 economic meeting in Buenos Aires, Argentina, American President Donald Trump and Chinese President Xi Jinping met. Surprisingly, they called off – temporarily – the next, incoming round of mutual tariff escalations set to begin at the turn of the New Year. But the announced 90-day delay in new tariff increases juiced both Chinese and US markets with a burst of optimism. Hooray! The US-China trade war is “suspended.” For now.
Is that long-awaited Santa Claus Rally about to begin?
US-China trade war suspension: Mr Market says “Yay” today. Big time.
Hungry for a good day, bulls rejoiced in this lull in the US-China trade war. They promptly sent the Dow Jones Industrials up well over 400 points not long after Monday’s opening bell.
As we write this column, around 11:30 a.m. Monday, here’s the current box score, according to CNBC.
“The Dow Jones Industrial Average rose 234 points while the S&P 500 gained 0.8 percent. The Nasdaq Composite rose 1.2 percent. The consumer discretionary and energy S&P 500 sectors were the best performers, jumping more than 2 percent. Amazon rose and Apple, rose 4.3 percent and 1.8 percent, respectively.”
In addition to the US-China trade war suspension President appears to have gained a significant concession from Xi. But it’s one the Trump-hostile media will most likely ignore. But CDN’s Jacquie Kubin highlights the Xi concession here.
“In what is being termed a humanitarian gesture, President Xi has agreed to designate Fentanyl as a Controlled Substance. This will hold anyone selling, or exporting Fentanyl to the U.S. from China, to China’s maximum penalty under the law.”
Will bulls take over market again?
As morning become afternoon, however, market averages continue to sink slowly lower, though still remaining positive. This might indicate that the initial boost of post-G20 enthusiasm for stocks could prove short-lived. But these days, you never really know how markets will close at that 4 p.m. bell. Maybe the suspended US-China trade war news is just a day-trade.
News items that could move markets in the days ahead
Innovative Income Investor’s Tim McPartland notes last week’s market moving action. He also provides additional key economic news items set to hit this week. Some of these could influence the market’s direction in coming days. One way or another.
“Last week was a truly exciting week for investors–at least common share investors as optimism reigned supreme for most of the week. The DJIA opened up the week at 24,364 and closed the week very near the high (25,549) at 25,538–a gain of near 1,200 points on the week. Obviously the signal for ‘lift off’ was the speech by Fed Chair Powell on Wednesday where he sent a dovish signal for future increases in the Fed Funds interest rate. The 10 year treasury traded in a range of 3.01% to 3.08%–closing the week at 3.01%…
“For this week we have Construction Spending being released today and we look at this importantly and late today we have Total Vehicle Sales being released and this also is an early indicator of future strength or weakness. Wednesday (now Thursday we think) we have the ADP employment report–not as important as the government ‘official’ report, but yet potentially important. Friday we have the government Employment situation report and the consensus for jobs it a gain of 190,000 versus last months 250,000.
“The Fed Balance sheet had a runoff last week of $9 billion versus $39 billion the week before.”
Fed balance sheet “runoff” slowdown may indicate a pause
This last item is a quiet hint that the Fed is pulling back, at least modestly and at least for now, from the overly aggressive rate hike environment that’s been killing stocks and home buying since Labor Day. Although the general public seems not to be aware, the Fed has also been dumping the huge cache of corporate bonds it scooped up during the Great Recession.
That action was another way the nation’s central bank added cash to the crashing financial system at a time that it was desperately needed. The Fed’s bond-buying program buoyed already sinking bond prices while putting actual dollars back into the system before deflation overwhelmed it.
But now, in addition to interest rate hikes, the Fed is slowly liquidating – i.e., selling– this massive bond inventory back to the public. Over time, this action effectively reducesthe public money supply as institutions, traders and investors buy these bonds back from the Fed.
Is the Fed finally waking up to how it’s killing the recovery?
Thus, we have a financial “pincer movement” going on in the bond market. The withdrawal of spendable and borrowable dollars from public availability causes further economic deceleration. That’s on top of the interest rate increases that have, thus far, nearly shut down the housing market by making mortgages unaffordable to all but the wealthiest buyers. The relentless hikes have also killed the investor appetite for stocks.
Cutting this bond repurchase program – the so-called Fed balance sheet “runoff” – is another indication that the Fed belatedly recognizes its “inflation fighting” overkill is now dangerously close to strangling America’s long-awaited, middle class-saving economic recovery. That’s the anti-regulatory and tax-cutting regime Trump and the GOP managed to engineer in 2017. Within just a year, they’d almost entirely reversed the Obama redistributionist policy of taking money fromthe beleaguered middle class and giving it to Democrat supporters.
But just as regular Americans were getting positive on the economy, the Fed launched its premature effort to remove the fiscal punch-bowl. The predictable, negative results ensued, particularly in stock prices.
Yes, lending rates do have to get back to “normal,” whatever that means currently. But abruptly canceling the party just when many Deplorables were being made whole after an lost decade was unwise. The temporary slowing in the Fed’s balance sheet runoff is a quiet acknowledgment of this painful fact.
Does Altria want us to smoke dope instead of tobacco?
In other news, CNBC just posted a headline about a significant investment by Altria (trading symbol: MO). That’s the Richmond, Virginia-based American tobacco giant formerly known as Philip Morris.
In addition to the US-China trade war report, when this news hit the wires, it threw a lifeline to the currently largest marijuana stock-centric ETF: “Alternative Harvest ETF (MJ). After languishing for much of last week, MJ has just bounced up over 0.60 per share. That’s at least a momentary gain of some 2 percent on the day. Nice Dreams, people.
All markets to close Wednesday to honor former-President G.H.W. Bush
One final bit of sad news will affect markets this week. All US markets will close for trading Wednesday to honor the memory of former President George H.W. Bush (Bush 41), who passed away late Friday evening. In addition, all Federal economic reports – and Fed Chairman Jerome Powell’s appearance before Congress – will carry over to Thursday. If they were scheduled for Wednesday.
We wish the Bush family well as they mourn their loss.
— Headeline image: Santa Claus Rally? Christmas image via Pixabay.com. (Public domain, CC 0.0 license.)