Stock markets have rallied to overbought levels, the FTSE 100 is now pulling back. The rally is nearing an end, in the US the S&P 500 is approaching the all-time high.
You will notice that the US trade war intensifies when the stock market is near the all time high and recedes when the stock market is too low. The US government knows the trade war is bad for the stock market, so they can only implement new measures when stocks are at high levels. They hope the stock market won’t be affected. If the stock market falls they back down or they distract investors with bullish news to rally the market.
In the last few years the position of the stock market has become an important indicator for the Fed and the US government. When you have a fragile economy you need a strong stock market to compensate. If the stock market is weak the economy goes into recession. If the economy goes into recession the risk of deflation rises and governments can’t afford deflation. You will recall it was precisely the collapse of the stock market in 2008 that prompted the Fed to launch QE to stop deflation.
This is why the Fed and the government will do everything to keep the stock market high. The thing is this time the Fed is running out of ammunition and the US government is running a massive budget deficit, it is virtually bankrupt. Their efforts will not be rewarded.
Therefore we can expect the stock market to pullback 2 or 3%, then it should rally again near the all-time high (S&P), at which point the trade war will intensify. Meanwhile the economy will continue to decelerate, this will create headwinds for stocks. Any trade war resolution will be offset by rising risk of recession. The stock market will trade sideways for a long time.