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Cool Video: End of Tariff Truce Spurs Over Correction

The S&P 500 recorded a key reversal on May 1, and the end of the tariff truce ensured follow-through selling. With today’s early losses, it is off nearly 3.5% this month. In my brief chat with Stuart Varney at Fox Business, I suggest that the stretched technical condition left the market vulnerable to a “buy in May and go away” scenario.

There was some suggestion that comments by Atlanta’s Fed’s Bostic playing down a rate cut may have spurred some losses. While this is possible, I see the market as rejecting other signals by Fed officials that it will be patient and in a wait-and-see mode. Despite attempts by some journalists and analysts to find differences, Fed officials have been singing from the same hymn book. Perhaps what as unusual (in the modern sense) presidential lobbying for rates cuts and quantitative easing, it has given Fed officials an incentive to close ranks.

I suggested that trade tensions with China and the broader consequences were the main trigger. The implied yield of the January fed funds futures contract has fallen 14-16 bp since the tweets declared the end of the tariff truce. The implied yield of 2.095% compares with the current effective average of about 2.39%.

Huawei was not initially about trade. It was a security violation. President Trump himself linked easing pressure on Huawei with a trade agreement. The escalation of the confrontation with Huawei and the nationalist chords being played in both countries make a quick resolution unlikely.

In the spring of 2018, US Treasury Secretary Mnuchin and China had appeared to strike an agreement. Trump rejected it, and the tariffs began shortly thereafter. The truce was reached when Trump and Xi met at the end of the year. Given the tensions, Lighthizer and/or Mnuchin going back to China at this juncture would likely be symbolic. We suggest that the next window of opportunity may be the G20 summit in Japan at the end of next month. Previously, the venue was promoted as a place to sign a final agreement. Now, the best that can be hoped for is re-start of serious negotiations.

The target I suggested for the S&P 500 is 2700-2720, and knowing the Varney watches the Dow Industrials, a similar objective is near 24700-25000.

Here is a link to the 2.5-minute clip.

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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