Did Donny Just Kill the Rally?

What You Need to Know Today

Things you need to know.

• Donny (using Twitter) threatens to raise existing tariffs of 10% to 25% on Friday if the Chinese don’t negotiate in good faith

• And then threatens to add 25% tariffs on an add’l $325 bil worth of goods

• Asian/European mkts come under fire – China loses 6%, Euro mkts off 2+%

• US futs have been getting clobbered overnight and show significant losses on open

• And missiles fly across Gaza and Israel creating more Mid-East chaos

Friday May 3rd  

the S&P and Nasdaq zoomed to another record….. closing up 0.96% and 1.58% respectively, while the Dow shot up 197 pts or 0.75% and the Russell 2000 added 31 pts or 2%.  The Hawkish yet Dovish FED along with better Eco data – specifically the NFP report – showed that we created 263K jobs in April – or 38% more than the expectation…..of 190k jobs….Unemployment plunged to 3.6% and is now at lows last seen in December 1969 (Actually the low in 1969 was 3.5%) while the Underemployment rate held steady at 7.3%.  Avg hourly earnings climbed by 0.2% m/m or by 3.2% y/y – healthy but not worrisome.  Market US Services PMI (Purchasing Managers Index) climbed to 53 matching the US composite PMI. 

[What is the Purchasing Managers' Index?  The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors. – Investopedia]

Recall that the PMI is on a scale of 0 – 100 with 50 being the dividing line between Expansion and Contraction…a read  over 50 is GOOD – suggests expansion, while a read below 50 suggests contraction – so Friday’s read of 53 suggests continued solid expansion. And the mkts loved it…traders, investors and especially the algo’s ate it up…..the robots cancelled in line offers on the book and boom there was a void in liquidity – forcing buyers (mostly machines) to just ‘go along’ and buy stock – Human beings were being selective and managed to take some money off the table as the machines continued to buy, buy, buy…..feeding the algo’s a little at a time – teasing them just enough make them want more….and more they did as they closed the mkts on their highs…

By the end of the day – going into the weekend – you had the Mariachi bands playing music on the floor of the NYSE (Which is just another one of their long standing traditions)  as we looked forward to ‘Cinco De Mayo’ and for those of you who are unsure why we celebrate that day with our Mexican brothers and sisters – it is because that is the date that commemorates the Mexican Army’s victory over the French Empire – at the Battle of Puebla in 1862. 

Sunday - May 5, 2019 - Twitter - @realDonaldTrump Tweets out and sends global mkts into a tailspin…..

“For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday.”

And if that wasn’t harsh enough – he then suggested that he was ready to impose a 25% ON AN ADD’L $325 BILLION OF CHINESE GOODS!  That can’t be a bullish headline….in fact many believe that such a move would massively disrupt the US economy as it begins to hit products that so far have been unscathed…..(Think smartphones and computers).  Look before you go and say he is out of control – understand this – the conversation with the Chinese has been going on for more than one year now – and despite slow progress – he (Donny) is becoming frustrated with the pace of these talks and with China’s recent about face over ‘forced technology transfer’ – Apparently they are not sure that they want to give relief to this practice. 

[Forced Technology Transfer -FTT – means that any foreign company that wants to enter the Chinese mkt – MUST SURRENDER THEIR TECHNOLOGY TO THE CHINESE – Capisce?]  So in our case – any US company doing business in China must give up our proprietary technology in order to play nice in the sandbox – and then the Chinese take that technology as if it was their own].

Oh boy…so much for the rally!  The news hit the tape at about 12:10 pm EST – and soon your phone was blowing up with BREAKING HEADLINES from CNBC, CNN, WSJ, REUTERS, BLOOMBERG, MARKETWATCH, etc…..

So by 8 pm Sunday eve in NY – it was 8 am Monday morning in Asia….and as is always the case – the Asians get the first crack at it…they get to react first to any headline that comes out of the US overnight or over a weekend….. Dow, S&P, Nasdaq and Russell 2000 Futures got slammed (no surprise) and then Asian mkts began the day….and it wasn’t pretty.  All mkts in that time zone came under pressure – Chinese stocks fell 6% as investors/traders and Algo’s digested the Tweets.  And then news that the Chinese are considering cancelling their trip to DC this week (as a result of the tariff threat) only added fuel to the fire.  

Look, no matter where you are in the world today - Trump has definitely set the tone for today and this week and has drawn a line in the sand -so will the Chinese cross it or will then stay home? Is this just another way to negotiate?  Is this the ‘Art of the Deal”?   Is Trump right to force their hand or should these talks continue to drag on and on?  Was this reckless?  Didn’t Stevey (Mnuchin) and Bobby (Lighthizer) tell us that progress is (or was) being made?  Even Larry Kudlow was dancing on the WH steps on Friday after the strong NFP report praising the current policies for the robust growth which included progress on trade talks.  So what happened between last week and Sunday that forced his hand?  Those are just some of the questions that face the mkts this week.  Japan -0.22%, Hong Kong – 2.9%, China -5.87% and ASX -0.82%.

European mkts are not doing much better as investors there now get a crack at it….and mkts there are sharply lower.  US/China trade taking center stage, Eurozone PMI data coming in at 51.6 – still expansionary but continuing to trend lower – Manufacturing continues to come under pressure – just more of the same.  But trust me – no one is even paying the least bit of attention to EZ PMI.  Investors, traders and Algo’s will show their displeasure with this latest news headline and mkts will suffer.  FTSE (Closed for Holiday), CAC 40 – 2.06%, DAX – 2.02%, EUROSTOXX – 2.03%, SPAIN -1.66% and ITALY -2.11%

US futs are (as you expect) sharply lower…..Dow futures point to a loss of 500 pts (-1.8%), S&P’s are off by 51 pts (-1.7%), Nasdaq – which has been the outperformer this year is down 179 pts (-2.2%) and the Russell is giving up 29 pt (-1.7%) .  Trade talks are supposed to continue on Wednesday in DC, but the WSJ and other media outlets are reporting that China is ‘considering cancelling its trade talks with the US this week in light of Trump’s latest threats’ as these tweets caught everyone by surprise. 

(Is it wrong to suggest that the SEC monitor the trading accounts of anyone associated with the administration? Just sayin’….. I mean it smells just a bit fishy to me….last week it was all about progress and understanding – helping to support mkts and investor psychology…and then on Sunday – this?) 

There are no eco reports today and even if there was – who would really be paying attn?  Later in the week – we will get PMI Final Demand for April m/m – exp of +0.3% and y/y of 2.3%, Ex food and energy m/m of +0.2% and for y/y of 2.5%.  Thursday brings us CPI m/m of +0.4%, y/y of 2.1%, and Ex food and Energy m/m of +0.2% while y/y is expected to be  +2.1%. 

Separately – more unrest in the Mid-East as fighting escalates between Israel and the Gaza Strip…..missiles going back and forth with reports of casualties being updated on an hourly basis.  The UN trying to negotiate a cease fire and bring calm to the region – the EU and the US calling for calm. 

Oil – under pressure as that mkt digests Trumps latest tweet….at 6 am – US WTI (West Texas Intermediate) has fallen by 1.3% or 80 cts to $61.14/barrel. The hike in tariffs (if they happen) will surely derail the months of talks between the US and China and threatens to cause global economic unrest – (that suggests that demand will fall).  But it says nothing about the increasing supply that is out there…..US production has continued to surge and we are now producing 12.3 mil of barrels per day – making us the largest producer in the world.  So talk of diminishing supply is ridiculous – there is plenty of oil out there.   Oil did breach support at $61.05 and $60.77 earlier today but has now rallied back to $61.24.  If she fails to hold right here then you could see a move back to $57/barrel.