China Trade Tea Leaves: Deal or No Deal

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Concerns over the escalating U.S. – China trade war that could cause earnings to downgrade to contagion in 2019 has been a major factor in lower stocks prices. The S&P 500 and Dow stock indices just finished their third test of the 10 percent correction support levels since the Oct. 3 record highs and one more test will likely trigger a tumble to new 2018 lows. For most of the year, Trump’s 2018 tax cuts and global tariff threats allowed the U.S. GDP and earnings to accelerate while global earnings decelerated. This provided a healthy buffer for U.S. stocks to withstand economic headwinds abroad until recently, while world indices negatively diverged. The time has arrived for a ‘deal or no deal’ risking a more serious global slowing in 2019.

We already have a more dovish Fed that has stopped talking about raising interest rates, but the greatest uncertainty hovers over the degree of downward earnings revisions tethered to the outcome of the China trade negotiations. Trump proclaimed a deal was at hand on Dec. 2 and the wary markets sold the news in disbelief. We can watch copper, soybeans and the Australian dollar as proxies for the marketplace consensus on the prospects for a positive or negative resolution to a deal.

If the market believed a trade deal was imminent, copper prices would be breaking out to the upside above $2.90. Instead copper sold off. Watch for a break below $2.60 on the downside as a sign of a severe escalation of the U.S. – China trade war and a move above $2.90 as a positive signal. The current trend is modestly lower.

When Trump announced his pause to trade threats and the proximity of a deal, soybeans should have sustained a multi-day surge higher. Prices did gap higher and have since edged slightly sideways to lower. Prices are clinging to the upper part of the trading range still hoping China will soon announce a major purchase of US Soy products. Assuming the recent arrest of a Huawei CFO in Canada are resolved amicably, the tea leaves suggest China will be announcing purchases soon. Chinese buying of U.S. agriculture isn’t vital to our farmers as our enormous production would replace the areas vacated by Brazil and others that shift to servicing China. However, improved trade prospects reconfigured by renewed Chinese orders for our soy would greatly increase the odds of a first quarter 2019 trade deal framework as well as higher soy and wheat prices. If China doesn’t announce new orders soon, soy prices will work lower.

Australia is a major supplier of raw materials to China and its currency is heavily influenced by China’s economic winds. When Trump announced improved odds of a trade deal, the Australian dollar joined the ranks with copper and soybeans in disbelief, hitting new three week lows. A breakout up or down from the recent trading range would be a strong indication of market expectations of a trade deal.

At present, these market proxies indicate that the prospects of a trade deal with China have not improved and a move above or below the recent price range in copper, soybeans and the Australian dollar can be used as barometers for the odds of a positive outcome to U.S. and China trade and consequently U.S. stocks.

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