China Hunkers Down for The Fight

What You Need to Know Today

• The tone changes again overnight – China ramps it up

• Mkts end weaker going into the weekend

• US futures under pressure even as Trump delays tariffs on European Autos

• Try the Chicken…

Mkts surged yesterday – as the algo’s took it all in…..somehow reading the headlines and finding all of them bullish (or maybe just ignoring the underlying negative tone to the trade headlines).  Mkts were higher in the pre-mkt and then traded higher after the opening bell rang as they seemed to discount the latest round of mortar fire being shot across the bow.  Yesterday’s eco data along with better than expected earnings being credited with most of the move – as trade talks got pushed to the back burner (for now).  Strong housing starts, stronger building permits, and a surging Philly Fed Survey all contributing to the mood… over the state of the US economy – seemingly ignoring the weaker data on Wednesday – Industrial Production  and Retail Sales.  Either way – it was a ‘feel good day’ in the face of the simmering underlying tension between the US and China. 

As the 4 pm bell rang – we saw the Dow up 215 pts or 0.84%, the S&P was ahead by 25 pts or 0.89%, the Nasdaq tacking on 75 pts or 0.97% and the Russell 2000 advancing by 8 pts or 0.58%.  In a surprising show of strength the Dow Transports jumped by 130 pts or 1.25% being the biggest beneficiary of the bullishness yesterday.  Now what is interesting yesterday is that all of these indexes – EXCEPT the Dow – kissed and pierced their respective resistance trendlines – ending the day on the north side of resistance.  The Dow rallied right up to resistance and then failed – unable to push up and thru – but never the less it was a good day for stocks – leaving them just below last Friday’s closing levels….so today is another day for the mkts to challenge those levels….but at the moment – that does not look like it’s going to happen…..

Mkts around the world all lower overnight as the focus shifts back to trade and the rhetoric heats up – the news on Wednesday evening which was ignored yesterday (interestingly enough) about Huawei and the National Technology Emergency now taking a seat front and center in the daily battle for direction as the mkts refocus on trade going into the weekend.  .  Remember that in yesterday’s note I said -

“And if that isn’t enough - last night Donny declared a National Emergency over threats to American Technology - calling out Huawei - the Chinese Telecom giant (that does all the spying) - putting that company back in the spotlight and making it more difficult for them to do business in the US with US companies....(just turning up the heat a bit more....). Expect that this latest salvo could be highly disruptive to US-China trade talks (and to our longer term relationship). China is sure to view this as ‘poke in the eye’, as a ‘hostile act and a major provocation’. Expect some kind of response in the days ahead..... this latest move is not going to be helpful to the trade talks……”

And overnight – the Chinese re-iterated their point and offered little guidance or willingness to come to the table.  Zhou Xiaoming – former commerce ministry official and diplomat had this to say to make the point

“If the US doesn’t make concessions in key issues, there is little point for China to resume talks. China’s stance has become more hardline and it’s in no rush for a deal because the US approach is extremely repellent and China has no illusions about US sincerity”. 

So it appears that the Chinese are under the assumption that it is the US that must make KEY concessions if we want them to come back to the table –  that they do not need to make concessions around Forced Technology Transfer (FTT) and IP (Intellectual Property) rights protections.  Recall that FTT  is when foreign companies (think US) HAVE TO PROVIDE ‘STRATEGICALLY SIGNIFICANT TECHNOLOGY’ to the Chinese in order for us to do business in that country.  – meaning we have to give up our technology (valuable asset)  to a Chinese company that we do not control – if we want to do business there -   That is not a reciprocal demand – the US doesn’t force anyone to give up proprietary technology to do business in this country – in fact we design incentives for them to come here,  set up shop and do business – hiring American workers in pursuit of their mission.  We do not force them to partner up with an American company to come here….which is different from how they structure it – a foreign company (think US) must partner with the Chinese company – and then turn over all of the IP as well.  It’s crazy really – and this point is at the heart of the discussions…and the Chinese have little interest in addressing it.

As a result – what the algo’s are realizing is that the Chinese are in NO rush to resume trade talks anytime soon……and unless the US removes all of the add’l tariffs recently imposed on China, and uses language that is balanced – ‘ensuring the dignity’ of both nations  - they have no interest….They can hunker down and deal with it….in the end – both sides now have to find a way to ‘save face’ and allow each side to appear as if they got something in these negotiations…

S&P futures are down 22 pts, Dow futures showing a loss of 202 pts, Nasdaq off by 74 pts and the Russell lower by 12 pts. – essentially giving back all of yesterday’s gains and its only 8:30 am!  Overnight Gao Feng – China’s Commerce Ministry Spokesman saying that ‘the US is exhibiting bullying behavior’ and that it is ‘regrettable that the US unilaterally escalated the trade dispute, which resulted in severe negotiating setbacks.”

So once again the smart logic algo’s read the headlines, assign ‘values’ to the words – mundane words have near zero value while negative/positive words have greater value and it is those values that control the logic in the algorithms that drive so much of the action across the 11 exchanges and 50+ dark pools that exist today in what we know as “modern mkt structure’.   (Negative words causing a wave of SELL orders – think Monday, while positive words create a wave of BUY orders – think Wednesday and Thursday)

And if that isn’t enough – where are about to get yet  another entrant into the exchange space – MEMX – the Members Exchange  - which is supposed to be an exchange that serves ALL OF ITS MEMBERS and not a select few – it’s funny though – the major backers are VIRTU and CITADEL – two of the biggest HFT firms out there – ones that some people define as ‘parasitic’ – so it’s gonna be an interesting journey to see how they deal with the commentary….….it’s exhausting…..Doesn’t anyone get it? No worries – that is at least 14 months away by the time they figure it out and get all the necessary approvals – unless of course we have another gov't shutdown in the fall – which is entirely possible –  because the country is due to  run out of $....and the discussions will be around raising cap spending limits along with the debt ceiling ….get ready for that fight because it is coming. 

Futures weakness this morning will take all of the indexes back below those resistance levels I pointed out and put us back in a tighter trading range.  For the S&P that means 2760/2860, for the Nasdaq that 7,535/7,860
For the Dow which never pierced up and thru - that range remains – 25,420/26,050.  It is the weekend –  China and Hong Kong both closed lower by 2.5% and 1.1%.  European mkts are all off to a weaker start as the headlines drive the action again.    Breaking news is that Trump has decided that he will NOT impose auto tariffs on Europe – so lets see if that changes the tone – as of now – it is not.  In the EU – BREXIT talks have collapsed again and the labor party will oppose PM May’s proposal. 

Recall that the last two weekends have produced rocky Monday’s as trade news hits the newswires on Sunday afternoons – causing disruption first thing on Monday.  I suspect more of the same – as the pressure mounts on both sides to appear as if they are making progress.  What investors do not want to see now is a complete breakdown in talks after the mkt has assumed some kind of a deal.  Just sayin’….

Eco data today includes Consumer Sentiment and specifically the inflation expectations contained in that report.  If  weaker then it will continue to be dovish influence on the Fed....possibly stabliizing stocks.   Fed speakers include Vice Chair Rick Clarida (10:00 a.m. ET, 1:40 p.m. ET) and NY's Johnny Williams (11:15 a.m. ET, 2:00 p.m. ET).  Both of these men are in a leadership position - so the mkts will be paying attn.

 

Balsmic Roasted Chicken

You need:  Chicken parts – on the bone. (thighs and breasts; skin on); Olive oil, Garlic – 1 head, but more depending on how much chicken you are making; Fresh rosemary, Fresh sage, Fresh thyme, Bay Leaves, onion, Olives – green and/or black, Kosher salt & fresh ground pepper,  and a good quality 'thick' Balsamic vinegar

Soak & clean the chicken.  Pat dry on paper towels.  Arrange in a roasting pan.  Drizzle with olive oil, rub it onto each piece. Season with salt & freshly ground pepper.

Peel garlic and arrange around and under the chicken parts.  Add rosemary, thyme, sage & bay leaves. Put the herbs around and under the larger pieces of chicken.  Add 2 cut up large onions and spread it around the chicken.  Use Vidalia onions if you have them, but any onion will work.

Roast the chicken in the middle of a 400 degree oven for about 45 minutes.  Check the pan every 15 minutes or so and remove any excess liquid with a turkey baster.  The object is for the chicken to roast, not braise. - Save the juice on the side in case someone wants some with their meal.

After 45 minutes, drizzle the chicken with the balsamic vinegar, add the olives,  turn the heat up to 450 degrees, and roast for 15 minutes more.
You can serve this with roasted vegetables, roasted potatoes or rice.  Always include a tossed green salad.