The threat of higher tariffs on China by the US is still the dominant force in the markets and investors are largely under the influence of the this. The US Trade Representative Robert Lightizer echoed president Trump’s message yesterday by confirming that increase in tariffs are going to take effect on Friday, if there is no deal with China before that.
Asian trading session has been feeble as a result of this and European markets are picking up the momentum where they left off yesterday. Major US benchmark indices also closed lower yesterday and the US futures are not looking pretty as well. If no common ground is established between the US and China, these worries would crush the markets and this could easily intensify the sell-off.
However, market participants still firmly believe that a deal is the final outcome. This is one of the reason that we have not seen the volatility index exploding again like it did when Trump initially tweeted about this. It is important to keep in mind that the volatility index has hit the highest point for this year and touched the level of 21.09 yesterday.
Another likely scenario which investors are looking at is that the additional tariffs introduced by President Trump may kick in first before China and US make a deal and this would only make the negotiations more arduous. If there is no deal between the two super powers by Friday, we are expecting the global equity markets to drop by at least 20 percent.
We are still in the earning season and the results so far have been pretty much astonishing, but if the tariffs are raised from 10% to 25% on $200 billion of Chinese good, it would also impact the S&P500 earning. These earnings can easily drop as much as 10% and the longer it lasts, the worse it would become.
Oil prices have been out of luck for the past few days and a positive signal has emerged. Speaking from a technical analysis perspective, the golden cross- when the 50-day moving average crosses above the 100-day moving average, has taken place for the Brent oil prices. It is likely that the path of least resistance may remain to the upside.
