foxex: Trading Places

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Markets Fall on Trade Negotiation Breakdown

Markets Close

Dow
25,169.53 -0.87%

S&P
2,706.05 -0.94%

Nasdaq
7,288.35 -1.18%

VIX
16.31 +6.05%

INV Anxiety Index
102.05 Neutral

US 10-Yr Yield
2.652 -1.85%

Trade Negotiations Fade

Just like that, the trade negotiations between the U.S. and China were doused with a bucket of ice water, as members of the Trump administration announced today that the two superpowers were far apart on a deal, and likely wouldn't meet again before the March deadline. That was enough to knock 200 points off the DJIA. The S&P 500 and the Nasdaq also fell around 1 percent.

Why it Matters:

The on again, off again uncertainty of the trade negotiations remains the biggest factor and the biggest obstacle for companies to forecast their profit and revenue targets for 2019. It has been the dominant theme in the fourth quarter earnings reports, and will continue to be for the next several weeks.

What Day is it?

It's easy to blame these start and stop trade negotiations for the market performance. Financial media does it all the time and I'm as guilty as anyone. While we can't ignore the impact of policy and economic issues on the stock market, sometimes there are just more sellers than buyers on a particular day.

But - what if the market direction was actually tied to the day of the month? Does it just happen to trade higher on some days than others? Fortunately, or unfortunately, there is plenty of data to back this up. This chart from YCharts was making the rounds on social media today; it traces S&P 500 returns since 1950 by day of the month. The first few days, the last few days and the middle of the month are generally better performers over time.

This is by no means a useful trading strategy or a blueprint for your investing future. We don't recommend that you trade or trade frequently...it's an easy way to lose money and wreck your life. It's just interesting.

Shares of Twitter (TWTR) fell more than 10 percent after the company projected weaker than expected growth for 2019. What's remarkable is just how ubiquitous the platform has become in pop culture, and how little value it has generated from its popularity. Tweets can set off cultural upheavals and dictate news cycles, but the company has yet to figure out how to monetize the platform like Facebook. Maybe that's why the company announced today that it will start reporting only its monthly 'monetizable' active users, instead of just its monthly active users.

Note to readers: When companies start messing with their reportable metrics, something may be rotten in the state of Denmark.

This chart, from Charlie Bilello of Pension Partners, shows what that rot might be.

Europe Hits the Brakes

As the March 29th deadline for Brexit approaches, the uncertainty swirling around Europe is intensifying. It only got worse today as The European Commission cut its growth outlook for the euro zone for 2019 citing global trade tensions, among other issues.

The Commission said euro zone growth will slow to 1.3 percent this year from 1.9 percent in 2018, before rebounding in 2020 to 1.6 percent.

Here's the key part of the statement from the Commission:

"A high level of uncertainty surrounds the economic outlook and the projections are subject to downside risks. Trade tensions, which have been weighing on sentiment for some time, have alleviated somewhat but remain a concern. China's economy may be slowing more sharply than anticipated and global financial markets and many emerging markets are vulnerable to abrupt changes in risk sentiment and growth expectations. For the EU, the "Brexit" process remains a source of uncertainty."

China slowing, trade tensions and Brexit...welcome to 2019.

Brexit Update

The 50 day countdown is on and today was not a good one for UK Prime Minster Theresa May. She's in a bitter showdown with the EU Commission on key terms of her Brexit plan, namely adding more provisions to the withdrawal agreement from the EU. The European Commission rebuffed May's request but did agree to continue negotiations at the end of the month. As usual, members of the UK Parliament blasted May in the press. As usual, May showed her resolve, taking to Twitter (what else?) to show her defiance. If only Twitter could monetize that!

Chart of the Day: Chinese Currency Responds to Heightened Trade Fears

As noted above, stocks dropped sharply on Thursday after reports surfaced that President Trump would not be meeting Chinese President Xi Jinping before the March deadline when the U.S.-China trade war "ceasefire" is slated to end. Back in early December, Trump and Xi agreed to put their ongoing trade conflicts on hold and refrain from imposing additional tariffs. As the March deadline looms on the horizon, a meeting between the two presidents would be necessary to halt escalation of the brewing trade war. In the absence of such talks, more tariffs on Chinese products entering the U.S. will likely go into effect.

The Chinese currency, or the yuan, has been a good barometer of the status of U.S.-China trade negotiations. More specifically, it's the movement of the yuan against the dollar, which is measured by the USD/CNH currency pair. As the chart above shows, when Trump and Xi announced that 90-day trade war ceasefire in early December, USD/CNH made the biggest two-day decline since 2005. This simply meant that the yuan appreciated substantially against the dollar on the news that tensions had begun to cool. Subsequent bouts of optimism about the prospects of a U.S.-China trade deal since then helped further push down the currency pair. Now that those 90 days may potentially run their course without a trade deal on the table, USD/CNH was on the rise on Thursday, which means that the yuan declined against the dollar on the hint of more trade troubles.

From a technical perspective, USD/CNH fell below its 200-day moving average last week. But it quickly recovered back above that key moving average and currently appears poised to rise further. Of course, this will depend partly on how trade war prospects develop in the coming days and weeks. In the event that a trade war can be averted or delayed before the March ceasefire deadline, USD/CNH is likely to drop back below its 200-day moving average and continue the falling trend from November. Any failure to resolve this conflict before March, though, could boost the currency pair back up towards the 6.90 level.