China Trade Tea Leaves: Deal or No Deal

Concerns of an escalating US – China Trade War causing earnings downgrade contagion in 2019 has been a major factor in lower stocks prices. The benchmark  SP 500 and Dow stock indices have just finished their 3rd test of the 10% correction support levels since the October 3rd record highs and one more test will likely trigger a tumble to new 2018 lows. For most of 2018, Trump’s 2018 tax cuts and global tariff threats allowed the US GDP and earnings to accelerate while global earnings decelerated. This provided a healthy buffer for US stocks to withstand economic headwinds abroad until recently, while world indices negatively diverged. The time has arrived for a Deal or No Deal and 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 December 2nd and the wary markets sold the news in disbelief. We can watch Copper, Soybeans and the Aussie 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 has sold off. Watch for a break below $2.60 on the downside as a sign of a severe escalation of the US – China Trade War and a move above $2.90 as a very 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 Chinese Tech CFO in Canada is resolved amicably, the tea leaves suggest China will be announcing purchases soon. Chinese buying of US 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, in the medium term improved trade prospects reconfigured by renewed Chinese orders for our Soy would greatly increase the odds of a 1st quarter 2019 Trade Deal framework as well as causing higher Soy and Wheat prices. If China doesn’t announce new orders soon, Soy prices will work lower.

Australia is 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 Aussie Dollar joined Copper and Soybeans in disbelief with a correction to new 3 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 US and China trade and consequently US stocks.

 

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