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China Trade Deal Looks Less Likely - Can Liu Save the Day?

Posted by Pete Stolcers on May 9

Posted 9:30 AM ET – Yesterday the market treaded water after a nasty decline Tuesday. US/China trade negotiations are all that matter during the next 48 hours. This is a binary event and it will determine market direction.

According to sources, China requested 150 pages of the trade deal last Friday. They made revisions and that is when Trump said that tariffs will be increased (according to plan) on Friday. The May 10th deadline for a deal has been known for weeks, but analysts thought that a deal would be signed this week. Those new tariffs go into effect tonight at midnight. At a rally last night Trump said, “They broke the deal, but don’t worry about it.” He suggested that there’s nothing wrong with another $100 billion in tax revenues.

Vice Premier Liu will arrive in Washington DC this afternoon and he will try to avert the new tariffs. He was scheduled for a four-day meeting and that was reduced to two days. If the new tariffs are imposed the negotiations will drag on for months and the market is likely to test the 200-day moving average. If the new tariffs are postponed, the market will rally on the notion that an agreement will be signed shortly. In this scenario the market should rally above the all-time high.

You know from my comments yesterday that I’m skeptical. China wants a deal, but they won’t play second fiddle to the US. Xi would rather see someone else in charge and Trump is the first president to challenge China. I would not be surprised if this drags on into 2020.

China’s economy has been drifting lower and aggressive stimulus (fiscal and monetary) has not stemmed the tide. Analysts were calling for a nice economic rebound in China and April’s PMI declined month-over-month. Yesterday we learned that exports fell 2.7% (down from a 14.2% increase in March) and they reported weaker than expected lending data last night.

Swing traders should remain on the sidelines. When the dust settles we will take a position. I suspect it will be on the short side.

Day traders should look for shorting opportunities. The market had priced in a trade deal and that looks less likely. Support at SPY $285 will be tested. The meeting with Liu will not take place until after the market is closed. There will be rumors throughout the day so take profits when possible.
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