Trump and the SP 500 need a win on trade

In the lead up to this week’s U.S. - China trade talks in Washington, an exchange of goodwill gestures including a two-week delay to the October 1 tariff increase in order to avoid a clash with the 70^th anniversary of the Peoples Republic of China sparked hopes of a trade truce or a “mini deal.”

After the last three trade truces ended in escalation it is difficult to assign an accurate probability to an agreement being reached this time around. Suffice to say that with President Trump now embroiled in impeachment and tax issues a “win” on trade would be a welcome development for President Trump and the slowing U.S. manufacturing sector.

Perhaps sensing this, Chinese officials have taken the opportunity to press home a perceived advantage as weekend reports alluded that the range of topics Chinese officials are willing to negotiate on has narrowed considerably. This has overshadowed overnight headlines that China is open to agreeing a smaller deal now with a view to continuing negotiations next year.

Unsurprisingly the S&P500 has given back a chunk of last Friday's gains as investors moved to the sidelines. A sensible course of action to avoid the increase in trade headlines likely forthcoming in the coming days and what appears to be an inevitable move towards escalation.  

Technical update:

After breaking and closing below the key 2940/30 support zone mentioned in this article last week https://www.cityindex.com.au/market-analysis/will-the-sp-500-remain-teflon-coated-in-october/ the S&P found support and rallied from ahead of the 200-day moving average currently at 2847.

The rally is viewed as countertrend in nature and while the S&P500 remains below the 3025/30 resistance zone and year to date highs, our base case remains for the current correction to continue towards wave equality support 2770ish with scope to 2728.75 (May lows).

In the unlikely event that trade talks do deliver a more broad-based trade agreement, a break and close above the 3025/30 resistance would be viewed as a precursor to a move towards 3150.

Source Tradingview. The figures stated are as of the 8th of October 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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