Trade War Breaks Out Between U.S. and China

The fireworks are behind us, the crates of beer long gone. This is the time for Wall Street to get back to business after a shortened trading week highlighted by Independence Day celebrations. With the party over, there will be no letting up, investors in for a jam-packed economic calendar this coming week.

This past trading week – despite the big drama over the weekend – signified a victory for the bulls. The S&P 500 succeeded in maintaining its uptrend that spans back to the February-April double bottom, ending the week nicely up by 1.67%. Though seemingly technically weaker, the blue-chip Dow has stably maintained its posture above the 200-period EMA, ending the week up 1.04%. When push comes to shove, the NASDAQ technically seems to be the strongest of all of the indexes, with a realistic possibility of reaching a new historic high this coming week. The index ended last week sharply up by 2.58%, with aggregate gains of 13% for the year to date.

About a little over a month ago, White House economic advisor, Larry Kudlow, characterized the negotiations between the U.S. and China by stating, “It’s not a trade war. It’s a trade discussion.” As such, on Friday, the discussion ended, and the war began. At precisely 00:01 U.S. Eastern time, the U.S. imposed levies on Chinese imports from China in the amount of $34 billion. China responded with tariffs of its own on over 500 American products, one of the key targets being agricultural goods.

President Trump didn’t hesitate to pull the trigger, announcing that the U.S. is set to impose tariffs of half a trillion dollars more on Chinese exports to the U.S.

We can confidently say that this time around the market shrugged off the news. Unlike other issues that have affected the market, this time Pres. Trump hasn’t shown any tendency to back down. On Friday, the market responded negatively to the news. It didn’t take long, though, for the bulls to go into full gear, sending stocks up – and big time!

Over the last few weeks, concerns revolving around the trade war with China have caused the market a number of problems. Market rallies quickly evaporated and technical levels barely held their ground. The indexes, though, didn’t succumb; that said, they faced ongoing pressure.

The first reason that the market rallied on Friday was June’s employment report. The economic headline packed a powerful punch; the unemployment rate and hourly wages, though, fell beneath expectations. These figures caused governmental bond yields to fall slightly, seeing that the numbers reduce a little bit of the pressure on the Fed to hike rates. One of the interesting developments is that despite the relatively moderate report, banks rallied and gold fell a touch, the exact opposite of what would have been expected.

The second reason for the market rally was that the trade tariffs didn’t come out of thin air, catching market players off guard. The date was penciled in in everyone’s calendars, the writing was on the wall. If everyone expects the very same piece of news, the response will usually be reserved, and over and beyond that, in some instances, the response will lead to movement that’s the diametric opposite of what could have been expected.

When push comes to shove, it would make sense that China feels like it’s in between a rock and a hard place, seeing that the risk factor in China is large. The Chinese Shanghai Index has recorded sharp losses this year, trading in bearish territory, while the American stock market has performed relatively nicely. The stock market and the economy are not one and the same, but the stock market usually does reflect economic expectations to a certain degree.

Things could be put as follows: even though the doomsday scenario bears foresaw has materialized, stocks rallied all day long, with little profit taking playing out leading up to the closing bell. The movement was a classic example of the market climbing and scaling past its fears. Many investors are concerned that bad news is going to set in and send the market lower, but when that scenario doesn’t materialize, buyers continue to jump in, the market climbing stably higher.

In Summary: Even though the trade war that has effectually broken out between the U.S. and China constitutes a weight on economic growth, it also regulates inflation, keeping it under control. The lack of wage pressure in Friday’s employment report will help the Fed keep interest rates low.

Even though the trade war, in all its permutations and iterations, is grabbing headlines, there has been a stable, positive flow of economic news. Employment is strong, retail chain sales are at an all-time high, building starts are at a 10-year high, and inflation is in a good place. A trade war does weigh on economic growth but there’s enough positive economic news to offset the cycle of tariffs and it seems that that’s what the market was communicating to us with its nice gains last week!

Have a great trading week!