Now that the US-China trade war is moving to a protracted string of verbal challenges – the US and China are in no hurry for a solution – markets are now learning that “hope” for the big deal that the press has sold is just that, hope that something will happen soon. Keep in mind that we have, from the start, focused on the idea that there are long-term structural issues that are part of the trade problems and it will take years to fix. The sudden escalation of the trade war surprised markets and many business leaders but now, they seem to be getting used to the notion that it will drag on. The key questions are as follows:
1. As this trade war progresses, China has asked for tariffs to be rolled back as a condition to go back to the table, just how much will it impact the US and Chinese economies? Lower growth in the US to 1.5% to 1.8% in the second half of 2019 is possible. But will China growth fall below 6.0%? Clearly the US and China are waiting and watching and if the global economy suffers damage, significant damage from this trade war, these two powers seem to be fine with that outcome.
2. The tweets from the US President Donald Trump in May, they have the Fed now focused on a change in policy but are investors too focused on “hope” for a cut for another equity rally? Is the Fed now tasked with advancing this equity rally? The Fed is just watching a weak US economy and knowing that China and other economies will weaken, they (the Fed leader) are looking to lend support.
For these reasons, and the uncertainty of the future of trading, feel that equity markets trade lower. S&P 500 could start to fade, taking the Nikkei 225 and other indices lower with it. The recent stronger-than-expect Payrolls did give pause to many investors, but we see confidence fading, and are preparing for a reversal and energetic shock to the bulls.