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Markets Quiet Waiting For News On Trade

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The US and China have the world’s leading economies when it comes to GDP. With over 7.55 billion people on our planet, China accounts for over 18 percent of the global population. In 2018, the Chinese economy grew by 6.6 percent making the Asian nation a significant force when it comes to the consumption of raw materials and products.

On the campaign trail in 2016, President Donald Trump pledged to level the playing field for international trade. The trade relationship between China and the United States had not changed since the days when China was an emerging economy rather than the second leading economic power in the world. Last year, the US administration embarked on a policy direction to fulfill its campaign promises when it comes to trade. The first step was a series of tariffs. China responded with retaliatory measures. Since the US is the leading producer and exporter of agricultural commodities, the Chinese response to protectionist measures caused significant price volatility in many agricultural markets. The wave of protectionism led to a period of negotiations between China and the US. Since the Chinese depend on US markets and other nations around the world for their imports and exports, the policies have weighed on their domestic economy causing turbulence in Chinese stocks and the need for stimulus by the government to devalue the yuan via lower interest rates and other measures.

Over recent weeks, optimism has been rising that Chinese and US negotiators are coming close to a framework for future trade which will lead to a ceremonial meeting between Presidents Trump and Xi where they will sign a deal that will end the period of protectionism. Since late December 2018, the price action in the US stock market reflects a consensus opinion that the period of tariffs and other measures will end sooner rather than later.  

Source: CQG

As the weekly chart highlights, the S&P 500 index has rallied over the past eleven out of thirteen weeks and has made up the lion’s share of losses suffered from early October through late December. However, price momentum has risen into overbought territory as the final stages of trade negotiations are now approaching.

At the same time, Chinese stocks have moved to the upside on the back of optimism over a trade agreement.

Meanwhile, it is possible that there will be speed bumps over the next two weeks. Negotiators have scheduled two more rounds of talks, one in Beijing and another in Washington DC before the two nations are ready for a meeting between the leaders where both can claim a win-win agreement. Therefore, with stocks in overbought territory, we could see an increase in price variance in stocks and markets across all asset classes over the coming weeks as the news cycle provides alternating reports on the state of the talks.

Stocks have come a long way since the late December lows. We should fasten out collective seatbelts over the coming weeks as the stock market is at a level where more volatility is becoming a lot more likely.



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About the author

Andrew Hecht is a commodity and options trader and analyst. He spent nearly 40 years on Wall Street, including two decades at Phillip Brothers, later Salomon Brothers and part of Citigroup. He executed some of the largest trades in precious metals and bulk commodities as well as booking ships, armored cars, and trains for transport. He has worked with the United Nations and maintains a global network of sources.

Andy is a top contributor at Seeking Alpha and other sites, a university guest lecturer, and consultant. His radio show, "The Commodities Hour with Andy Hecht," airs Tuesdays and Thursdays 5-6 PM EST on TFNN. Andy’s first book How to Make Money with Commodities, has received excellent reviews.  

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