A growing number of analysts, ourselves included, have long waited for a correction in the stock markets. But the wait must continue as conflicting signals regarding the US-China trade deal prevents market participants from taking bold directional positions, with most speculators happy to remain nimble in this market environment. Still, a short-term retracement may be on the cards judging by this week’s price action.
The markets have been propped up by optimism that the US and China will soon end their trade dispute, with the rally finding additional fuel from major central banks’ ultra-loose monetary policy stances. However, over the last couple of days, one or two reports have emerged that said the two sides are not as close to agreeing a “Phase One” trade deal as the markets had anticipated. Indeed, Reuters reported yesterday that the deal may not be completed by the conclusion of this year after all. As a result, stocks slumped, although Washington later tried to ease concerns by suggesting – once again – that “progress is being made.” Today, a report by South China Morning Post said the US may delay the December 15th tariffs, if a deal is not reached by then.
While this helped the indices to come off their lows, the bulls were hesitant to step in meaningfully. The markets are increasingly getting fed up with the rhetoric. Investors now want to see action as we head to year end. In any case, we continue to think that much of the optimism is already priced in given the sharp gains on Wall Street over the past several weeks. So, if the two sides were to agree on some sort of a phase one deal eventually then the potential upside move for stocks could be limited anyway.
But tight now, the key question is have we seen a short-term top? Well at the start of this week, it looked like the melt up would continue unabated as a number of leading indices such as Germany’s DAX broke out. However, that turned out to be a false break, thanks to profit-taking amid mixed signals regarding the US-China trade situation. The fact that the index went back lower, trapping the breakout bulls, means that the bears may finally have a case here. At the time of writing, the DAX was testing 13140 – the former support area which broke down following that false breakout move earlier in the week. If the bears are to have a real crack at this, they must defend this level on a daily closing basis today. However a close above here would probably end the bearish bias.
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