[Chart courtesy of MarketWatch.com]

1. Moving the markets

Just when you thought the trade deal was dead, news that US and Chinese officials declared a tentative resumption of tariff talks made the headlines, and off to the races we went with the computer algos pushing the indexes sharply higher.

Mind you that nothing worthwhile was accomplished. The warring parties simply agreed to talk again around “early October,” which these days is considered enough of a progress in the yearlong trade conflict for equities to surge.

To be fair, bullish sentiment was boosted by a couple of economic reports. First, ADP estimated that the private sector added some 195k jobs in August, which raised expectations for a good number tomorrow when the BLS releases its jobs report.

Second, despite recent surveys pointing to weakness in the manufacturing sector, the ISM rebounded, even though 60% of its components weakened. Nevertheless, for the day, the markets treated ‘good news’ as ‘good news’ with equities spiking.

That spike came in the face of sharply surging bond yields with the 30-year heading back above 2%, while the benchmark 10-year dashed 10 basis points to 1.58% before pulling back into the close.  

The S&P 500 broke out of its 5-week trading range (upper blue line) leaving a break-away gap behind (red circle). This gap will need to be closed at some point, so it’s questionable at this moment in time whether this breakout has enough legs to take out July’s highs.

This strong up move in the face of dramatically rising bond yields is unusual and, while this push benefited the S&P 500, it’s low volatility cousin SPLV, which I have preferred during this ‘Buy’ cycle, lagged and did not participate.

This means for this current cycle, which started on 2/13/19, the S&P 500 (SPY) has made up some ground and is now showing an +8.28% gain, which is still substantially behind the SPLV’s +12.89%.

Tomorrow’s jobs numbers are bound to affect market direction. The question is “which way?”

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The major indexes staged a turnaround, after yesterday’s pullback, encouraged by an apparent ease in Hongkong tensions. Chief executive Carrie Lam announced that she would withdraw the controversial extradition bill that has sparked months of violent protests, which were feared to eventually hurt the business climate and global financial markets.

While this bill meets only one of five demands from the protesters, at least it’s a step in the right direction, which put the computer algos into a buying frenzy and spreading a sea of green in equities.

Also helping the bullish mood were reports that the People’s Bank of China will soon implement cuts in reserve requirements for Chinese banks, a move that is expected to boost growth and shows willingness by the government to battle the effects of higher US tariffs on Chinese imports.

This readiness by the Chinese to engage in some sort of stimulus eased fears, at least for the moment, that the US economy might slide into a recession in part due to the endless US-China tariff conflict, which has been a contributing factor to not just a worldwide disruption of supply chains but too a slowdown of global economies.

Likewise giving an assist to the bullish cause was more dovish encouragement from a variety of Fed speakers that rate cuts are on the menu. ZH summed them up as follows:

Williams (Dovish): “Ready to act as appropriate”, July cut was right move, economy mixed (admitted consumer spending not a leading indicator), international news matters, low inflation biggest problem.

Kaplan (Dovish): “Monetary policy a potent force”, worried about yield curve inversion, economy mixed (factories weak due to trade, consumer strong), watching for “psychological effects” on consumers, “if you wait for consumer weakness, it might be too late.”

Kashkari (Dovish): Tariffs, “trade war are really concerning business”, job market not overheating, slower global growth will impact US, most concerned about inverted yield curve. Fed’s policy is “moderately contractionary.”

Bullard/Bowman (Looked Dovish): Took part in “Fed Listens” conference but made no comment on policy but then again when has Jim Bullard ever not been dovish.

Beige Book (Mixed): Moderate expansion but trade fears are mounting, but optimism remains, despite what Kashkari says: “although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook”

Evans (Dovish): Trade policy increases uncertainty and immigration restrictions lower trend growth to 1.5%, Auto industry especially challenged

As a result, the markets have now ‘priced in’ an astonishing 124 bps (1.24%) of rate cuts through the end of 2020. Tip of the hat goes to ZH for this chart. On the other hand, a trade deal is now almost entirely ‘priced out,’ which means that the only ‘big dog’ left to support equities is none other than the Fed and its policies.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Last week’s rally was based on nothing more than rekindled optimism that the ever-accelerating trade war with China may be “again” on another verge of the warring parties agreeing to a ceasefire.

On the other hand, how many times can you cry “wolf” before it’s being ignored.

Apparently, we have not reached that moment in time yet, as on Sunday morning, against all wishful thinking, the US slapped tariffs on $112 billion in Chinese imports. It only took 1 minute for China to retaliate via higher tariffs on some $75 billion of US goods.

That killed the “trade deal is imminent” proposition, and it became clear that Tuesday’s market reaction would be a negative one, and that’s exactly what happened.

Assisting the sour mood of traders and algos alike was a report showing that US manufacturing is the weakest in 10 years, and the headline manufacturing number plunged into contraction.

At its lowest point, the Dow was down over 300 points, and the S&P 500 almost closed the breakaway gap I mentioned last Thursday, while the index seems to be heading towards the lower band of the 5-week trading range.

With the slippage of the markets, it appears that there may be some recoupling of stocks and bond yields in the near future, as the jaw of death has closed slightly—and not in favor of stocks.

We will find out soon enough if that tendency continues.