Moderate Rally As Trade Worries Linger

The S&P 500 was up 0.22% as the stock market continued its upward momentum from late in the trading session on Monday when Peter Navarro calmed the markets. The Nasdaq and Russell 2000 regained even more of their losses as they were up 0.39% and 0.66% respectively. Press secretary Sarah Huckabee Sanders seemed to support more of what Mnuchin said than what Navarro said when she stated, “As the Secretary said, a statement would go out that targets all countries that are trying to steal our technology, and we expect that to be out soon.” The market is simply waiting to see what the statement says on Friday.

To be clear, Peter Navarro is a proponent of tariffs, so his statement has credibility as well. The good news is that this situation is all a negotiating tactic. The bad news is firms may temporarily pull back on capex until clarity returns. The stock market can rebound easily once a deal is made, but capex will take weeks or months to come back after this potential weakness. I’m not even sure how much capex will be impacted by these tariffs. That’s a second derivative level of uncertainty.

I’m guessing the Trump statement on intellectual property will come out on Friday because that’s what the Wall Street Journal report from Sunday stated. I’m happy the market fell in anticipation of the statement because it shouldn’t be shocked when it comes out. If the statement is what the market expects, there should be a relief rally. There are algorithms which trade based on Trump’s tweets and each news event in this tariff skirmish. However, you can look towards the intermediate term to game this system if you agree with Buffett and Paul Tudor Jones that this will be solved amicably because trade is mutually beneficial.

Treasuries, Dollar, And Oil

The 10 year yield fell slightly and the 2 year yield was flat. This means the curve flattened slightly. As of Tuesday night, the 10 year yield was 2.8784% and the 2 year yield was 2.5404%. This makes the difference between the 2 yields just 34 basis points, which is the flattest of this expansion. The bulls hope that the curve will steepen again if the trade skirmishes are worked out. I think the Fed can easily rescind one of its rate hikes this year after seeing the continued pressure the economy is under because of the tough trade talk.