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  • Stocks tank on US/China trade deal uncertainties and inverted yield curve
  • May’s Brexit deal draws more opposition by the day
  • Today is a partial U.S. holiday

Stocks tank on US/China trade deal uncertainties and inverted yield curve — The stock market on Tuesday fell sharply with the S&P 500 index closing down -3.24%, the Nasdaq 100 closing down -3.78%, and the Nymex FANG+ index closing down -3.81%.

Bearish factors on Tuesday included (1) uncertainty about how long the US/Chinese trade ceasefire will last, (2) increased talk about a recession after the short-end of the yield curve inverted on Monday, (3) concern about peak earnings as SPX earnings growth is expected to ease to +10% next year from this year’s stellar +23%, and (4) the dour prospects for Brexit.

The markets on Tuesday became much less optimistic about Saturday’s US/Chinese trade ceasefire as it remains completely opaque as to what China actually agreed to.  Part of the problem is that Chinese President Xi and his top advisors have been traveling since Saturday’s Trump-Xi meeting and are not scheduled to return to China until Thursday after visiting Portugal on Tuesday and Wednesday.  

The markets are hoping to receive some clarification as to what China agreed to after President Xi arrives home in China on Thursday.  In the meantime, top officials in China are refusing to comment further on the US/Chinese trade deal.

The key problem is that there was no joint statement from Saturday’s meeting and each side issued their own widely-diverging statement.  China failed to mention in its statement, for example, the U.S. claims of a 90-day deadline and a Chinese promise to immediately start buying “substantial” amounts of U.S. farm, energy, and industrial products.  China has not as yet dropped any retaliatory tariffs on U.S. farm and other products so it remains unclear why private Chinese companies would start buying large amounts of expensive, tariff-laden U.S. products.

The markets on Tuesday were also unhappy to hear Mr. Trump’s tweet that if a “REAL deal” with China is not possible, then remember “I am a Tariff Man.”  Mr. Trump also clarified that the 90-day ceasefire began on the Dec 1 dinner meeting date, not on the Jan 1 date specified on Monday by White House economic advisor Kudlow.  The clock is therefore already ticking.

The stock market on Tuesday was also hurt by the flattening yield curve, which is often a precursor for a recession.  The Treasury 3s-5s spread on Monday and Tuesday actually inverted with the 5-year yield falling to 2.79% on Tuesday, which was 2 bp below the 3-year yield of 3.81%.  The 2s10s spread so far this week has fallen sharply by -8 bp to 12 bp, which is the flattest spread since June 2007.

 

 

May’s Brexit deal draws more opposition by the day — Prime Minister May’s Brexit withdrawal agreement seems to be attracting more opposition by the day.  Parliament is debating the deal this week and is scheduled to hold a final vote next Tuesday (Dec 11).

Parliament on Tuesday dealt Ms. May a defeat with votes that held her government in contempt and forced her to release her government’s secret legal opinion on Brexit.  That legal opinion is expected to be released today and could contain some nasty surprises considering that Ms. May was trying to keep it secret.  Ms. May on Tuesday also lost a vote that now gives Parliament more of a say in a Plan B if Ms. May’s plan is voted down next Tuesday as expected.

In addition, a big trap door opened on Tuesday after the European Court of Justice delivered a non-binding advisory opinion saying that the U.K. could unilaterally decide to reverse Brexit and stay in the EU.  That boosted the hopes of the “Remainers” for a second public referendum in which the UK public decides to stay in the EU.

Without some intervening miracle, it seems very likely that the UK Parliament next Tuesday will vote down Ms. May’s Brexit deal.  If the plan is voted down, Ms. May could keep trying to get Parliament to pass the bill on a second or third try, or Ms. May could return to Europe to try to negotiate a better deal.

However, Parliament’s rejection of the Brexit deal next week could also result in political chaos if Ms. May receives a leadership challenge from within her own party or if Parliament entertains a no-confidence motion that results in the fall of her government and new elections.

GBP/USD on Tuesday edged to a 1-1/4 year low of 1.2659, but then rebounded to close the day just slightly lower by -0.05% at $1.2719/GBP.  The FTSE 100 index on Tuesday closed -0.56%, giving back part of Monday’s +1.18% rally.

Today is a partial U.S. holiday — The U.S. stock and cash fixed income markets are closed today, along with CME equity and interest rate futures markets, to honor former President Bush.  Federal offices are also closed today except the Fed’s bank payments system will be operational since banks will remain open.  Fed Chair Powell’s testimony to the Joint Economic Committee of Congress, which was originally scheduled for today, has been postponed and a new date has not yet been announced.  CME and ICE commodity futures markets are open today during regular hours.

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