Tariff deadline approaches
US stock index futures were little changed in early trade on Wednesday. Yesterday the S&P 500 spent all morning in negative territory and seemed on course to post a significant loss for a second successive trading session. Speculators were becoming increasingly concerned about a lack of progress in the US/China trade dispute ahead of this weekend’s deadline for the next round of tariffs on Chinese imports. But stock indices bounced sharply ahead of yesterday’s US open. This followed a report from the Wall Street Journal (WSJ) claiming that the White House had agreed to delay Sunday’s planned tariff hike. There was no immediate confirmation from the Trump administration. In fact, later in the day White House economic advisor Larry Kudlow said the 15th December deadline is still “on the table.” Then overnight White House Trade Advisor Peter Navarro told Fox News that he has "no indication that December tariffs will not be put on." The Chinese yuan tumbled on the news while stock indices were little moved.
It’s interesting that members of the Trump administration should be talking down the likelihood of agreement ahead of Sunday’s deadline. Usually we hear stories of trade dispute breakthroughs, even though these have all turned out to be false so far, with further tariff increases coming in response. It could be that the US is attempting to dial down expectations and that we’ll end up with a fudge with the US claiming that enough progress has been made to delay tariffs beyond year-end. But if the US does go ahead with threatened tariffs, the probability is that China will retaliate, and trade talks will collapse.
Monetary policy meeting
Later today the US Federal Reserve will conclude its last monetary policy meeting of the year. The central bank is expected to keep rates unchanged in a range of 1.50-1.75%. The US central bank last met in October when it cut its fed funds rate by 25 basis points for the third time in four months. The Fed has also engaged in unprecedented balance sheet expansion since mid-September. This is despite assurances that the US economy is doing well. But on Monday the Bank of International Settlements (BIS) released a report which said that the problems in the US repo market which triggered the Fed’s stimulus are based on structural issues linked to big banks’ holdings of Treasuries, and their corresponding cash shortage. The BIS warned that the repo market issues aren’t going away even as the Fed throws money at it.
US stock index futures ended last week with a stunning rally following a much better-than-expected Non-Farm Payroll report. But the S&P has pulled back since then, falling back within the upwardly-trending channel that has been forming since the summer. It has also been unable to break new ground following the record high hit in November just above 3,150.
Despite the sell-off at the beginning of this month, the S&P is now just 0.5% off its record closing high. Many observers continue to insist that US equities remain overvalued and overdue a more significant correction. But the Federal Reserve continues to pump out monetary stimulus and this is undoubtedly supporting the S&P. Meanwhile, the clock is ticking as Sunday’s tariff deadline approaches. The outcome of US/China trade talks will decide how the S&P behaves over the short term.