1. Moving the markets

The major indexes edged higher early on, as the S&P500 fought hard to reclaim its 3,000-milestone marker. The index fluctuated all day slightly around that level but ended up slightly below it.

Helping the bullish enthusiasm were news of a potential Brexit deal, which turned out to be more of a rumor than a fact. Keep in mind that any new agreement still would need to be ratified by the British PM and the U.K. Parliament.

Economically speaking, the news provided a continued mixed picture, as Soft Survey data have completely decoupled from stock market levels, while the US Macro Surprise Index did an about face, causing ZH to quip “use it or lose it.”

Industrial Production hit the skids and, on a YoY basis, shrunk for the first time since Trump’s election in November of 2016.

As I pointed out before, the US is not an island and, unless there is progress in global trade disputes, domestic econ data will hit the skids even more, which eventually will affect the direction of equities. Same trade disputes may impinge on earnings as well, just as last month, when bellwether FedEx cut its profit outlook in part due to trade and economic circumstances.

Given that, it’s almost a certainty that not only the Fed, but also other Central Banks (CBs) as well, will endorse more rate cuts in coming months to combat economic weakness. And that is exactly the fly in the ointment: Rates are already so low that CBs don’t have much room to act and put a bottom under equities. That means, eventually, bad economic news will be bad news for stocks.

From a technical point of view, a breakout above the September highs and then above the July all-time highs could, against all fundamental odds, bring a resumption of the bull market back into play. These days, anything is possible, meaning that we need to be prepared to deal with the unexpected.  

1. Moving the markets

After the “mini trade” deal faded yesterday, today’s news brought into question whether anything was accomplished. Chinese officials essentially confirmed that the progress on the “phase 1” deal may have been a sham.

Beijing will make good on the $50 billion of annual agricultural purchases, but only if Washington agrees to remove all the trade war tariffs. On the other hand, Trump has made it clear that the tariffs must remain in place until a deal has been implemented with the Chinese proving that they are abiding by the rules.

While the futures markets slumped on the news, this was quickly forgotten as the computer algos jumped on the earnings bandwagon with traders cheering a bunch of ‘not really’ upbeat corporate earnings reports thereby pushing the “phase 1” trade deal on the back burner. Also throwing in a temporary assist to the bulls were news of an alleged breakthrough of the always changing Brexit negotiations.

In the meantime, the Fed’s overnight Repo operations to provide liquidity to banks surged to nearly $90 billion, which means the initial problem I posted about is anything but transitory and will eventually affect stock markets. The question in my mind is not “if” but “when.”

Despite best efforts, the S&P 500 fell short of reclaiming its psychologically important 3,000 level. It may break through it, but it will then face stiff overhead resistance at the high end of the trading range at around 3,022. If we get there, the index may very well turn around again to close its October break-away gap (blue) before possibly starting another rally attempt.

ZH summed up the rally-on-no-news like this:

China (negatively) snubbed Trump’s trade deal overnight, demanding tariffs removed before Ag buy.

China (negatively) saw CPI surge, somewhat reducing option of brad-based stimulus

Brexit (positively) was reported as being closer to becoming a deal.

Fed Repo bailout (negatively) surged to its highest since September.

Tariffs (positively) did not get implemented today (which is, of course, old news).

Earnings (negatively) signaled ugliness persists for GS and WFC.

Earnings (positively) beat (with UNH, JPM and JNJ helping support The Dow).

IMF (negatively) downgraded global growth to weakest since Lehman.

1. Moving the markets

After 1-1/2 years of trade negotiations, last Friday’s “mini-deal,” if you can even call it that, cast some more doubt on the substance of what was accomplished. The words “deal” or “substantial” just don’t fit the picture of what some analysts have called nothing more than a “farm package.”

China has agreed to increase its purchases of US farm products up to $40 to $50 billion with no time limit attached, while the U.S. postponed planned increases in tariffs. That was the entire story upon which the computer algos went crazy and drove the Dow up over 300 points.

While today’s lackluster session was as much a function of the bond markets being closed for Columbus Day, a big contributor to the lack of buying was the general perception that the “phase 1” China deal will not improve trade barriers nor encourage economic growth any time soon.

Not helping matters was a report from Morgan Stanley calling last Friday’s close to be the high for stocks with selling now being on deck, as they see the trade truce to be disappointing and a boon for the bears.

However, markets could break in either direction, if you look at this updated chart from Bloomberg, which makes the case that, based on history, we could see a repeat of 1987 or 2013. If the perceived accuracy of this chart continues, we will find out the answer real soon.