A China trade deal suddenly looks like pie in the sky. The best-case scenario: a cease-fire — before President Donald Trump doubles down again, targeting all Chinese imports with 25% tariffs. That's not exactly a bullish outcome for investors. Even worse, the only path to get there may be through a significantly lower Dow Jones. It's a good bet that's Chinese President Xi Jinping's plan. If so, the stock market is cooperating.And from ZeroHedge, May 16:
Dow Jones, Stock Market Tumble On China Trade War
On Monday, the Dow Jones slid 617 points, or 2.4%, while the Nasdaq composite sank 3.4%. All but one of 30 Dow Jones components fell on the stock market. Apple (AAPL) led the way lower, falling 5.8%. Boeing (BA) and Caterpillar (CAT) fell nearly 5%.
The sell-off deepened as China hit back against the U.S. Beijing hiked tariffs on $60 billion in American imports to as much as 25%. That followed Trump's move Friday to lift 10% tariffs to 25% on $200 billion in Chinese imports. Wall Street awaited the Trump administration's next list of targets, due out late Monday. Trump has said it would include the remaining $325 billion in Chinese imports. The Apple iPhone, iPad, Apple Watch and laptop computers likely will show up on the list.
Monday's Dow Jones drubbing surely didn't escape Trump's attention. He sounded a bit less married to his plan to unload one more massive round of tariffs in an afternoon press conference. "We have the right to do another $325 billion at 25% in additional tariffs. That is a tremendous amount of money that would come into our country. I have not made that decision yet."
Xi's China Trade Talks Shift
It could take a couple of months before Trump trade officials seek comment, hold hearings and, finally, let loose the next round of China tariffs. But Beijing has made clear in recent days that there's no middle ground for a deal.
Since last Friday, Chinese officials have indicated that caving to Trump's demands would be humiliating. The U.S. insists that China write new laws resolving complaints over theft of intellectual property, forced technology transfers, currency manipulation, access to Chinese markets and state subsidies. Even then, Trump tariffs would remain in force, with some falling away as Beijing clears these benchmarks. China says it would change regulations, but not laws. It won't make concessions unless the U.S. removes tariffs. It also has pushed back on the size of the purchases it would make to narrow the trade gap....MORE
How Low Will The S&P Fall Before Trump Capitulates To China? JPMorgan Has The Answer
Three days after we published our take on the latest Flows and Liquidity report by JPMorgan's quant Nikolaos Panigirtzoglou, whose conclusion was "problematic" as it contradicted the hypothesis previously laid out by JPM's more recognizable (at least to the broader public) face, Marko Kolanovic, with the Greek strategist stating that any assumption that institutions or retail investors are underinvested is wrong, and instead finding that "neither institutional nor retail investors are currently underinvested in equities. In fact we find that the opposite appears to be true...", Kolanovic has responded (just as expected, "always on an uptick"), and not surprisingly, has stuck to his core argument, stating that "overall, positioning remains muted, and absent new geopolitical escalations, equity downside should be limited. This is consistent with our last report, where we pointed out that pullbacks are likely to be less severe compared to those last year."
In other words, one banks, two world class quants, two diametrically opposing conclusions. Good luck humans trying to figure out how to trade this market.
In addition to the now traditional "good quant/bad quant" back and forth between JPM's Croat and Greek quants, Kolanovic also provides a brief discussion on the current "client" climate, writing that the "clients we’ve spoken to are trying to grasp the implications of the political landscape and 2020 elections." What appears to be the source of confusion, is why Trump would risk destabilizing the market and economy just over a year before the 2020 elections, by escalating the trade war with China, a feud that could result in both a sharp market, as well as a recession, both of which would undermine Trump's re-election odds. Here is Kolanovic:
Based on the current polls, it seems most likely that the presidential candidates will be Trump and Joe Biden. It also seems that Trump stands a good chance to get re-elected unless there is an economic deterioration in the US. Despite the ongoing stimulus in China and a solid US economy, it’s possible we could have a slowdown or a recession if the trade war escalates further, which would likely lower Trump’s chances of winning in 2020 due to the potential selloff in US stocks, direct GDP impact of trade breakdown, increasing consumer price inflation, etc. It should thus come as no surprise that some Democrats would welcome this path. One should keep in mind that academia, businesses, and central banks have written extensively on the counterproductive impact of trade tariffs. This was well summarized by the late president Ronald Reagan and more recently Larry Kudlow. The stock market is indicating that the trade tariff approach is likely detrimental to the value of US businesses and hence the US economy.
With the above in mind, and noting that China has various additional levers to pull to preserve the status quo, such as "control of monetary and fiscal authorities and even the 'National Team' to support the stock market (i.e. the actual “Plunge Protection Team”)", Kolanovic goes back to his argument from early 2018, according to which Trump is ultimately a rational entity, and as a result, "trade war will get resolved and that latest trade escalation is just a short-term hurdle, before favorable terms for the US are reached."
Finally, one day after JPMorgan's other Croatian strategist (and Kolanovic' co-worker), Dubravko Lakos-Bujas, the bank's chief US equity strategist said that if US-China trade talks fully collapse, "the S&P 500’s next 12 months’ per-share earnings will take a ~$9 cumulative hit, sending the S&P down about 11% from Wednesday’s close" to around 2,550, Kolanovic recalculates what may be the most important number for the stock market - the "Trump Put", or the level on the S&P at which Trump will concede a loss to China and capitulate to Xi Jinping.
According to the JPM quant, the US administration has made it apparent that "the tone and sentiment towards the trade war changes with roughly ~100 points on the S&P 500."
As RaboBank's Michael Every recapped most recently yesterday, Kolanovic points out that the market moving higher "generally leads to a hardened stance and more confrontational tone, and the market moving lower generally leads to either verbal or actual progress towards trade resolution", i.e., Trump conceding to Chinese demands....MORE
In this context, Kolanovic introduced the concept of a ‘Trump put’ in 2017, which the strategist writes has "now evolved into a ‘Trump collar’ (i.e. limited upside due to escalation of the trade conflict)."
