Can China's Economy Take The Pressure?

Written by Dennis Slothower
Posted August 31, 2018 at 8:00PM

With no imminent announcement of a trade deal with Canada to go along with the one made earlier this week with Mexico, traders started wondering why, with some willing to put some cash on the sidelines going into a long three-day holiday weekend (Labor Day on Monday). It didn’t help when it was reported that President Trump is prepared to put an additional $200 billion in trade tariffs on China as early as next week.

Perhaps traders were lulled into complacency after seeing the deal with Mexico shape up so quickly followed by Canada entering into talks only a couple days later. But China appears to be far from willing to negotiate a more level playing field on trade. And with the stock market at record highs and several bilateral trade deals underway, Trump probably felt he had nothing to lose by going at China a little harder.

After all, China’s stock market is in shambles — officially in a bear market right now. So, applying trade pressures to an already weakened Chinese economy may be just what is needed to force China to the table for trade talks more balanced toward the U.S. economy. Check out China’s Shanghai index:

As you can see, China suffered along with all equity markets around the world in a February sell-off. But the Chinese markets went sideways for only a couple of months and then took a dive in early summer and have fallen to bear market lows this month (August).

This President is pure business and knows when to take advantage of an opponent. Even though we are heading into the mid-term elections and the Republicans would benefit from kid-glove handling of all things financial until these elections are behind us, Trump doesn’t care (or at least he is not worried about the markets). It is all about getting a better trade deal and right now is a great time to hammer China again.

Traders didn’t like it though, with all U.S. indexes pulling back. Should China respond with expected further tariffs against the U.S., then the stock market will suffer until these two giants can settle this trade imbalance once and for all. In other words, expect September to be a lot more challenging for our indexes to keep setting new record highs, especially as we get past Labor Day and energy prices retreat (traditional effect).

A lot is in place for a traditional tough time for traders in September and October, with a renewed China trade war, the dollar rebounding from oversold conditions, and energy likely retreating a good deal. Energy prices represent a serious cost/expense for most businesses and individuals but, with rising energy prices, it also contributes to higher index prices because of oil-related industries benefitting handsomely. In fact, a whole bunch of that Q2 GDP at 4.2% is because of the profitability of energy-related shares. Those industries that rely on energy have suffered to see that nice GDP created by hiked energy prices.

Housing data was disappointing on Wednesday, as pending home sales dropped 0.7%, following recent declines in both existing home sales and new home sales.

Matching all of this negative news on home sales, it was natural to also hear that mortgage applications also fell 1.7%.

Traders ignored this building bad news on housing, preferring to concentrate on the trade talks and wars.

Remember that, whatever is negotiated by the Trump administration between our neighbors to the north and the south, Congress will have an opportunity to weigh in on these “deals” and vote to agree with the administration before they can become official “Agreements.”

Also helping the bulls ignore any negative economic news or an overbought market, the Commerce Department released a revision of Q2 GDP that bumped it up from 4.1% to 4.2%.

A bit surprising, since many economists were expecting to see the revision dropped to 4.0%.

Look for trade talk news to ramp up next week after the long Labor Day weekend. The pressure on Canada from both the U.S. and Mexico appears to be having the effect President Trump has predicted. His tariff threats and actions have led to a more fair trade deal than the old NAFTA agreement.

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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