24-08: Ping-Pong against China

Before the US markets opened yesterday, China announced to put new tariffs of $75bln on US goods and resumed tariffs on US cars. Not a bad move from China after Trump showed some ‘weakness’ and tried to deescalate the trade war a couple of weeks back by delaying tariffs on some Chinese goods to the end of the year. China has the initiative now. Trump was very angry about these new tariffs. Probably while he woke up and was brushing his teeth he asked himself the question who is the bigger enemy: Powell or China? But more importantly, about who am I going to tweet first? His impulsiveness especially on China is not helping him.

With this tweet, he had to come back in the afternoon with a retaliation that would not be weak. He also immediately tweeted that US companies should rapidly start with finding alternatives for China. But what he came back with in the afternoon was not very creative. He came back with raising all tariffs on Chinese goods with an extra 5%. Little bit of a small hike and not showing strength. But he had to do something after his ‘just out of bed’ tweets.
End result was that the S&P fell nearly 2.5%!

Started the marathon with aggression

Trump started this trade war very aggressively and as with every war or match, getting to 1-0 is always what you want.

But he has been too aggresive, too coercive and limiting the options the US has. He started the marathon with a sprint, now to find out that he is not able to finish in time while the Democrats are lining up for beers at the finish to have a nice dinner with the Chinese.
With the back and forth sanctions between the US and China, the trade war ping-pong has started. Very bad strategy to play ping-pong against China.

Why is that?

Trump wants to get reelected in November 2020. And he also wants to make sure the US stays the prominent economy in the world. The US has a massive trade deficit with China which Trump sees as a threat for US jobs and national security. Moreover, China has deserved the reputation as an intellectual property thief. With the trade war Trump wants to slow China’s economic growth further to make sure they will negotiate about the topics that Trump finds important. Trump thinks the Chinese have no other way than to do concessions. Wrong!
The problem is that Trump’s time is running out. If he goes to far with the trade war, the US economy will be hurt badly as US consumers have to pay the bills for the trade war. He will have small chances to get reelected in a full escalation.
China is playing it hard. They are happy taking an economic hit now and make an ‘easy’ deal when a Democrat gets elected as president. Trump is getting out of options. He was hoping for the Chinese to give in and make a nice deal with him. He has been pushing the Chinese so much and not doing any concessions himself. The Chinese have taken over the initative, are ready for some smashes and the only thing Trump can do is defend to stay in the match, hope for the best and probably give up a little bit in the end.

Jackson Hole

Main expected event this week was the yearly conference at Jackson Hole. A valley somewhere in the middle of nowhere in Wyoming in the United States. The FED holds its annual economic symposium in Jackson Hole. But there is no need to talk much about it. The FED will take appropiate actions when needed according to Powell and currently he did not seem that concerned about the economy (yet?). Non event. When would the FED not take appropriate actions then? Words, but empty sentences.
For Trump, every outcome except ECB-like rates are not enough and he blames Powell for not doing anything.

And now?

It is getting clear that Trump is slowly losing this trade war and the Chinese have made up their minds. They are not going to be nice and happy. They are going to fight hard and go for a deal with a democratic president. My opinion is that the Chinese are not going to give in and that Trump is going to get a lot of pressure from the big US companies. He has to give in here and there, though this might take months to happen. Till then the markets will be volatile. Trump is pressuring the FED to lower rates more in September and be dovish. And after that make a ‘GREAT’ deal with China?
Last weeks and also in the upcoming weeks very interesting stock and option trades are appearing. Check below for these opportunities.

16-08: Market Doubts

The financial markets experienced a volatile week. The market is doubting which direction to go. Below a short overview of what has been moving the markets and what can be expected in the upcoming week(s).
To find out which individual opportunities are arising:

What is moving the markets?

  • Recession fears
    Germany quarterly GDP was below 0. If we get another quarter in Germany below 0 we officially enter a recession. Fears of a recession and recent profit warnings of companies are fearing investors.
  • Bond yields
    Bond yields ave come down massively. German 10-year yield is around -0.80%.
    The US yield curve is inverting more and more! Investors are struggling to see long-term high economic growth and inflation. And see below a picture of the US 30 year yield that has been coming down and down.
  • ECBs next bazooka
    ECBs officials are pointing towards another massive stimulus package. In another so called last attempt to bring back inflation. Whatever it takes is still live.
  • Hong Kong chaos
  • US-China trade war
    Trrump is unpredictable and China does not like to get bullied. Trump needs to ease the trade war to get reelected, but when will he do so?
  • Company earnings
    Are getting impacted by the tariffs.. For example Macy’s reported disappointing earnings and lowered the guidance.

And now?

The main problem is that there are too many uncertain variables for investors to enter the stock market and to choose a direction. As you can see above there are so many factors playing the markets. In the end, most will come down to a solution in the trade war between the US and China. As long as there is not a strong belief that a deal will be made this year, the markets will experience high volatility and you will experience high swings in your portfolio.
Market shocks will be bringing opportunities. Some stocks will get punished too much by irrational behavior or illiquidity. To find out which opportunities arise, check the stock reports, 
Short term trading is very difficult at the moment as you are depending very much on headlines regarding the US China trade war. For long-term trading, keep averaging down and do not read too much into every headline. Everyday there is a new surprise (or not).
Regarding a recession, yes it might happen. How long does it take? There is not much wisdom to communicate on this matter. Keep reinvesting the dividends seems a sensible thing to do. Do not let market fears affect your rational decision making.