Will the S&P 500 Shrug Off US-China Trade Fears?
Matt Weller, CFA, CMT May 6, 2019 2:08 PM
For a market that had been pricing in an imminent resolution to the US-China trade tensions after weeks of “productive” talks, Sunday’s tweet caught traders off guard: All major Asian equity indices closed lower on the day, highlighted by a sharp 5.6% drop in China’s Shanghai Composite.
Traders in both Japan and the UK were out of their offices for bank holidays today, leaving lower liquidity conditions across global markets. While the absence of a major global trading hub or two usually passes uneventfully, it can lead to outsized moves when there are unexpected market-moving developments… and President Trump’s threat to ramp up tariffs on Chinese goods certainly qualifies in the current environment!
Reportedly frustrated with the lack of progress on technology transfer law, President Trump vowed to increase import taxes on $200B of Chinese goods from 10% to 25% on Friday. For a market that had been pricing in an imminent resolution to the US-China trade tensions after weeks of “productive” talks, Sunday’s tweet caught traders off guard: All major Asian equity indices closed lower on the day, highlighted by a sharp 5.6% drop in China’s Shanghai Composite.
The fears spilled across the Pacific, with US index futures trading off by more than 2% at points, but the losses have narrowed since US trading began, with the S&P 500 shedding under 1% as of writing. The price action so far today suggests that traders believe a deal is still probable, albeit marginally less likely.
In any event, both the fundamental and technical backdrop for the S&P 500 remain bullish. As my colleague Fawad Razaqzada noted last week, Q1 earnings season got off to a strong start, with nearly 80% of S&P 500 companies beating earnings estimates and 60% beating on revenues (we’ll review the earnings season as a whole next week, after 90%+ of companies have reported).
From a technical perspective, the S&P 500’s bullish trend remains intact. Despite today’s gap lower, the index remains in the middle of its recent bullish channel, above its upward-trending 50-day moving average. Both the MACD and RSI indicators are in their own bullish ranges, suggesting that the uptrend is still healthy:
Source: TradingView, FOREX.com
Despite the potential for escalation in the ongoing US-China trade war, S&P 500 bulls remain firmly in control.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.