Asian markets remain cautious

What You Need to Know Today:

• US/China trade talks making headway

• Atlanta Fed Pres - Raffi Bostic hints on rates in 2019

• Get ready for earnings season – JPM kicks it off next Tuesday

• Member's Exchange? Funny how Bell Bottoms are back too!

• US/China trade talks making headway

• Atlanta Fed Pres - Raffi Bostic hints on rates in 2019

• Get ready for earnings season – JPM kicks it off next Tuesday

• Member's Exchange? Funny how Bell Bottoms are back too!

China, China, China – that is the question....mkts enjoyed an UP day on Monday to kick off the week......the US and China actually sat at the table on Monday and now Tuesday as they try to lay the groundwork for what a deal could look like on trade policy. Hope IS alive and the recent mkt activity reveals that global investors want a resolution to this extended fight - and while it is positive that they are sitting down at the same table the next move in the mkts will be decided by what happens AT that table.... Yesterday the Dow added 98 pts, the S&P surged by 18 pts, the Nasdaq tacked on 84 pts while the Russell Small/Mid Cap added 24 pts – putting US small caps in the lead for the year – currently up 4.8% ytd. (the Dow just went positive at +0.87%, while the S&P and Nasdaq are +1.3% & 2.8% respectively).

And this morning – futures are pointing UP again and global mkts are up as investors continue to wait the latest developments. Commerce Secretary – Wilbur Ross had this to say

"I think there's a very good chance that we will get a reasonable settlement that China can live with, that we can live with".

And that is fueling this latest move...... At 5:45 am - Dow futures were surging by another 130 pts, S&P up 14 pts, Nasdaq is adding 29 pts while the Russell boasts another 5 pt move higher. Excitement over trade is at the top of the list, but running a close second is – Yes – Interest rate policy – so not to be outdone – Atlanta FED President Raffy Bostic did say yesterday that there might only be 1 (0ne) rate hike in all of 2019 and that may not be until the second or third qtr...so we have plenty of time to see how the macro data performs and how the trade talks proceed.

And with all the talk of the FED being more ‘thoughtful' – we have seen rates back off a bit... the 10 yr that spiked up to 3.25% in early October is now at 2.66%. This morning the WSJ runs with a story that mortgage rates have fallen to the lowest levels in 8 months. – 30 yr money is now running at 4.5% and that is down from nearly 5%...so the cost to carry a $500k mortgage just went down by about $150/month. ($30 per $100k) and that should help the housing mkt.

Asian mkts remain cautious – with Japan + 0.82%, Hong Kong + 0.15%, China – 0.22% and ASX + 0.69%. China's foreign ministry did release a statement saying that ‘Beijing is willing to resolve its trade disputes with Washington on equal footing' and that is being taken as positive – I mean how could you interpret that as negative? The word you are looking for is ‘cooperation' and that is what investors around the world want – US/China cooperation. Now while it does feel good right now – Simon Baptist – Chief Global Economist at The Economist Intelligence Unit is more cautious saying telling CNBC's Squawk Box -

"that what really matters is these issues over market access, that's the thing the US firms care about. Have a level playing field when they're competing against the (state owned enterprises) and others. .....the issues around intellectual property and technology transfer".

They went onto say that they are ‘still not optimistic' that both sides can reach a deal by March 1st and that China would have to ‘significantly re-calibrate tis industrial policies to fully meet the US demands'

And while that is not screaming positive – the mkt is betting that something is in the works and is choosing to focus on that right now. March 1st is a self-imposed deadline – and if there is movement on trade then that date remains a moving target and can be adjusted to reflect the discussions. If though, there really isn't any positive developments then that date becomes a trigger point for further tariffs. So it is a date to watch.

European mkts are also up this morning as the focus remains on the trade issue as well and while that is important – Europeans are also focusing on BREXIT. Britain's PM Terry May is expected to lose a vote later this month as Parliament votes on her BREXIT plan and if that happens then a second referendum may be the only way out.....and that means that while the Brits voted two year ago to leave – they still can't figure a way out – so lawmakers are calling for a ‘do over' or a new vote that could potentially change the path of history again – leaving the UK (United Kingdom) in the EU (European Union)......and so we wait. FTSE + 0.84%, CAC 40 + 1.19%, DAX + 0.62%, EUROSTOXX + 0.87%, SPAIN + 0.88% and ITALY + 0.48%.

Next up – Earnings - And with earnings season only days away - JPM kicks us off next Tuesday – January 15th – investors realize that any positives that come out of these meetings will cause a surge in the mkts – and dare I say that the mkt will go up just as fast as it went down – as the algo's remain firmly in control. And while we expect earnings to grow at about the 10% range (+ or – 1 or 2%) it is as usual - the guidance that will drive investor reactions...remember – earnings are history – they have already happened – they are what they are – but it is the guidance (like we saw last qtr) that will drive the next move.....Recall that last qtr – we killed it – earnings grew 25% y/y – as they did in the prior 2 qtrs last year – but it was the uncertainty in the guidance, the cautiousness that threw the mkts into a tizzy on top of how the smart logic algo's interpreted comments coming from Fed Chair Jay Powell about the future of interest rates. We heard caution in nearly every conference call (think the multi-nationals) as CEO's and CFO's laid out the next 3 to 6 months of an extended trade war – and it wasn't pretty....as the mkt tanked sending the VIX (fear index) up 213% by the end of December...... that same index has now come in by 42% as the level of anxiety subsides on hopes of continued growth in earnings and a trade deal that removes so much of the uncertainty in guidance. (To put it in perspective – while the VIX shot up 213% - the Dow & S&P fell by 20%, now the VIX has fallen by 42% and the Dow & S&P have risen by 8% - while both the Nasdaq and Russell had more dramatic moves – both falling 24% and now rising by 11% during this same time frame.)

Side note – did you see the story in yesterday's WSJ about the NEW STOCK MARKET that is being launched by ‘ a group of financial heavyweights' – to challenge the NYSE and NASDAQ. This new exchange – named – Members Exchange – will be controlled by 9 big investment banks, brokers and High Frequency Trading firms – names like Morgan Stanley, UBS, BAC, Fidelity, Citadel, Virtu Financial, Charlie Schwab, E Trade and TD Ameritrade – going back to the ‘old days' when the exchanges were owned by their members – Funny how that works right? When we had that – those same firms screamed and yelled about how the game was rigged, how the ‘exchange' was a boys club etc....and now those same firms want that ‘boys club'? It's like fashion – have you seen that Bell Bottoms are making a come back too! But what will this do exactly? Further bastardize the system – have they not caused enough disruption and destruction already with their internalization engines that rip the liquidity out of the public mktplace (have you seen the say stocks trade recently?) – taking complete advantage of the fractured and fragmented structure we have today? Bryan Harkins - Head of the mkts division at the CBOE said:

"Healthy competition ups the game for all of us and we welcome new entrants into the space" – Dude Really? This isn't retail...you can't buy KO at $30 on one venue or sell it at $70 on another venue when it trades at $46.95. That is where it trades – so having 11 exchanges plus 50 + dark pools does nothing other than create confusion and fragmentation and bastardization of the system. Look – I get it in retail.....You can go to Nordstrom's and buy a suit for $1000 or you can go buy that same suit at Jos Banks for $200 and get 2 more suits for free! You can't do that with stocks – You can't buy 100 shares of KO at $46.95 and get 200 more shares for free – IT IS NOT THE WAY IT WORKS...the price is the price – so why exactly do we need another exchange in the mix? We already have 11 - Why do we need 50 + ‘alternative venues' or ‘dark pools" – places where the public can't see price in the mix? Oh right – so that the big investment banks, HFT firms and wholesalers can take advantage of the fragmentation – good for them, bad for the investor – and in this case I am not talking about the retail guy that wants to buy 100 shares of KO and put it in his trading account. I am talking about the millions of people that are invested in their 401k's or mutual funds that are now considered ‘institutional money' – and it is those investors (ultimately retail when you think about it) that are getting ripped off with the current fractured mkt structure.... Don't even get me started on this.....

Ok – so futures are still up 17 pts at 7 am – that takes us up to 2565 ish – if it holds....not a level where it will find resistance or support – so it now feels like we are in the 2500/2600 range...remember – 2600 does not represent resistance at all – other than being a round number....real resistance will be at 2641 – the down trending 50 dma line...and this will prove to be formidable for investors to get thru.....the tone will really have to change for us to challenge and pierce this level on the first try......but it is only 100 pts away from last nights close – so any good news will see the mkts surge....so strap in....it's so much more fun when the mkt is surging vs. when it is collapsing....!

Oil remains sub $50/barrel but is 77 cts higher this morning at $49.28. More China talk and OPEC led cuts will try to stabilize prices – yet remember – the US is now producing oil at MORE THAN 12 mil bpd. (barrels per day). That put us at the top of the leaderboard! $50 does represent resistance – and there is no reason yet for traders to take it above that level – so it will remain in the $45/$50 range for now....but again – any positive development on trade will ignite excitement all over the place and assets will price accordingly.

Gold is a perfect example...it is down $5 this morning as trade talks continue.....now it has spiked lately with the collapse of stock prices and tension with China – but as you can see – as this all settles down – the safety trade – Gold – gets less exciting and money moves from gold to stocks. We hit our heads on $1300/oz last week and now remain in the $1265/$1300 range. If we get more positive news on trade then we could see gold fall and test the next level of support at $1245/oz.