Originally posted at ExecSpec.net
Virtually every week this year confidence of a major trade agreement between the US and China has grown. Just a few days ago Trump surrogates spread rumors that a deal would be announced in a week. Suddenly, a lack of progress on trade deal enforcement terms has triggered Trump to threaten dramatic new tariffs on China by May 10th if this isn’t resolved. US stock indices quickly fell 2 percent Sunday night on the surprising news. This could all be Trumpian gamesmanship, but China is now mulling suspending negotiations. Such a response could send stocks lower by a few more percent within hours, making this the biggest correction of the year. If China sends its trade delegation to the US this week, then stocks will stabilize. We have been cautioning of a temporary summer top at record highs around the May time-frame regardless of a trade deal and we have stated the obvious caveat that an escalation of the tariff battle would severely impact stocks and potentially the US economy more than currently expected.
Oil continues to be in sync with stocks in the bigger picture and has fallen overnight with stocks on Trump’s new tariff threat. While a dip just under $60 a barrel oil is today’s risk, new tariffs could easily send oil to $50 quickly. A May 10th trade resolution this week could also set up a reversal for prices to rebound to their 2019 peak.
Clearly this is a pivotal week for the markets that feel blindsided by the appearance of a trade negotiating impasse. If China announces the suspension of trade talks or fails to settle the final barriers to an agreement by May 10th, then we enter a turbulent market-moving news environment with a growing downward bias the longer US talks with China are stalled. Our economic forecast for a recession-free period over the next couple of years or more has always been predicated on a successful outcome to the US and China trade agreement. Lack of a trade agreement in 2019 would raise the odds of a near-term recession and much lower stock prices. The probability of a good deal still remains favorable along with more record-high stock prices, but the caveat emptor warning of past reports regarding an exogenous variable of a new trade war escalation has now become front and center to the current economic and financial market outlook.