The US indices are trading only four percent below their all-time high. Although the situation on the markets has been substantially clouded. What’s going on?
Since May 3rd when US President Trump sent his irreconcilable tweet about the failure of negotiations with China into the world Wall Street prices have fallen for four weeks in a row. But to what extent? Just over four percent of its all-time high. But the situation on the markets has turned substantially worse. The increase in tariffs to 25 percent and the prospect of further increases in China’s total export volume, the ban on Huawei, the danger of war with Iran in the Middle East and the tensions in the Chinese sea just to name a few of the immense problems with price relevance.
The belief in economic victory
Why don’t the markets fall massivly downward with these reports?
They probably think one step further. Trump doesn’t risk a stock crash and will row back. Ratio versus emotion
In our comment of 7 May we described the dilemma:
There are two key priorities that determine all actions to be taken by the United States:
- Donald Trump wants to be re-elected in 2020 and to do so he absolutely needs the support of Wall Street
- the US society cannot tolerate a crash on the stock market without severe effects on prosperity and inner peace.
That’s still true. Trump may rumble as much he can.
Since 3rd May when Trump send his tweet the broad market has fallen by not quite 4 percent, the chip industry by 13% and Apple by 13% (22% of the high).
The markets as a whole still believe Trump’s version of the strong US economy and that the trade war with China will be won without much damage.
A US manager made an interesting statement. The symbiosis between the USA and China has worked for decades and it makes no sense to end it with a trade war. The US consumer industry is based on product diversity which is supplied cheaply by China. We have no chance of replacing this in the short term and there is not even a Plan A for the transition from a consumer to a production industry.
If the dispute continues there will be a hard landing for the USA.
How does it look from a sentimental point of view?
Bank of America/Merril Lynch’s monthly survey of fund managers shows an increase in hedging transactions. The trade war between the USA and China has led to the hedging of portfolios against falling prices.
This is shown by the put/call ratio on the Chicago futures exchange CBOE.
Only 73 percent of US fund managers are currently still invested. A decline in the investment ratio of nine percent compared to the previous week. The conclusion to be drawn from this is that a large proportion of the positions have been liquidated and the cash holdings increased. The bull/bear index is clearly negative at minus 9.5 percent.
The Fear&Greed index of the US stock markets is in the neutral range at 39 percent. Like other short-term indicators. This was the level at the beginning of the week.
All in all this means that we are expecting falling prices – and here we are again on the annoying subject of short squeezes.
Overall one thing is certain: The markets were expecting a shorter trade dispute because they were assuming that the president was rational – and this could have been a temporary misconception.
That is why we must now price in the collateral damage of the trade dispute assuming it continues.
But if Trump wants to ignore the reaction of the markets he would need something else that he can present as an inevitable factor for this circumstance.
For example a military escalation with Iran – that would distract its clientele…