Based on comments and analyses as below, we can conclude that US...

  1. 19,990 Posts.
    lightbulb Created with Sketch. 1943
    Based on comments and analyses as below, we can conclude that US market optimism last Friday may well have got ahead of itself - it was a relief rally and for it to be sustainable, it needs to be backed by real action, not promises nor feel good rhetoric (like lovefest lol) .

    All the risk elements (Trade war, Brexit, HK, Middle East tension, impeachment ) that created uncertainty for trade , business investments and finally consumer sentiment (which affect consumption) should not be viewed in isolation simply as events in themselves. Together they create a perfect storm brew that invariably and ultimately lead to economic contraction - and economic contraction and worse a recession is the recipe for disaster (to use POTUS own language) for the mountain of junk bonds and BBB bonds that could be downgraded to junk (see chart and Moody's extract on the increasing default rate on US and Europe junk bonds that was written in Jan 19 and the picture definitely has worsened since then) - this is what we should be focusing on - the elephant in the room is the Humongous Debt Pile  waiting to implode when the economy worsens.

    And as John Hussman pointed out (see my posts yesterday), interest rate cuts by the Fed nor negative rates are unlikely to be the saviour to both the economy nor the markets if risk aversion is high [ and now is the highest since the Lehman Bros crisis with investors flocking to money market funds at the highest level at $322b over the past 6 months ] . You can't simply expect people to borrow more when they are uncertain over their jobs and when they are already highly geared , and you can't expect people to continuously support the equity markets when volatility is high in the presence of those prevailing risks and when people have become more risk adverse.

    And this is precisely why as long as those political clowns remain in office , the uncertainties and risks will not decrease- they increase- who just pulled US troops out of Syria on a whim and fancy (as if we dont have enough problems) (without proper consultation and due process on the wider ramifications - yes the Kurds are turning to the Russians now so the latter will have more influence in the Middle East than ever, and if Turkey is being punished with a Trump sanction , a NATO ally could turn to Russia as well).


    Morgan Stanley warns tariff escalation remains a ‘meaningful risk’ despite partial US-China deal

    PUBLISHED 2 HOURS AGO

    Emma Newburger@EMMA_NEWBURGER


    KEY POINTS
    • Without a durable dispute settlement mechanism in place, another round of tariff increases cannot be ruled out, according to Morgan Stanley.
    • Goldman Sachs sees a 60% chance that the announced 15% tariffs will take effect, but expects a delay until early 2020 as opposed to the current deadline of Dec. 15.
    • Evercore said it expects a delay and no additional tariff hikes in 2020.

    Morgan Stanley says President Donald Trump’s partial trade deal with China is an “uncertain” arrangement at best and there does not appear to be viable path to reduce existing tariffs at the moment.

    The U.S. agreed to suspend a tariff increase on at least $250 billion in Chinese goods to 30% from 25% set for Tuesday, but a tariff hike implemented in September was not rolled back and plans for another hike just before the the Christmas holiday on Dec. 15 remain in place.

    Without a durable dispute settlement mechanism in place, another round of tariff increases cannot be ruled out,
    according to Morgan Stanley.
    “There is not yet a viable path to existing tariffs declining, and tariff escalation remains a meaningful risk,” the bank said in a note. “Thus, we do not yet expect a meaningful rebound in corporate behavior that would drive global growth expectations higher.”  [ as I mentioned yesterday ]

    The president said that the first phase of the trade deal will be written over the next three weeks. As part of phase one, China will purchase between $40 billion and $50 billion in U.S. agricultural products.

    Evercore wrote that the first phase of the U.S.-China trade deal doesn’t clear the air for global corporations to decide on where to invest, produce hire or source. If the U.S. maintains a “stop the China rise” mentality perspective, the trade war will continue, the firm wrote.

    “Trump’s statement that ‘We are near the end of the trade war’ is not plausible to us,” Evercore wrote in a note. “We do not expect tariff cuts in 2020 – but are ready to be favorably surprised.

    “And as long as such punitive tariffs remain, we would describe US-China economic relations as bad, not good.”
    Goldman Sachs sees a 60% chance that the announced 15% tariffs will take effect, but expects a delay until early 2020 as opposed to the current deadline of Dec. 15. Evercore said it expects a delay and no additional tariff hikes in 2020.

    In the past year, the U.S. has set tariffs on billions of dollars worth of Chinese products, and China has retaliated with its own levies, igniting concern over slower global economic growth and weaker corporate earnings.

    JP Morgan said the first phase of the deal is a positive development after months of trade escalation, but that the outcome is not a surprise for the market. It expects that US-China tension could escalate again, especially during the 2020 presidential election.
    “Investors had high hopes for some form of mini-deal in the weeks before the meeting, and Friday’s announcement has at least been partially, if not fully, priced in,” the firm wrote.

    Macro impact of the mini deal removes some downside risk in the next quarters, but does not affect the economic slowdown trend, JP Morgan wrote.


    Wall Street has doubts after partial trade deal: ‘I don’t think this gets us to Christmas’

    PUBLISHED FRI, OCT 11 20195:03 PM EDTUPDATED SAT, OCT 12 20194:11 PM EDT

    Bob Pisani@BOBPISANI


    KEY POINTS
    • Investors cheered a partial trade deal with China but soon realized there is no clear timeline for removing existing tariffs.
    • Chinese companies do not meet U.S. accounting standards, and there’s been no clear progress with its regulators.
    • Nevertheless, delisting Chinese companies from U.S. indexes is not an attractive option for many investors.
    After a partial trade deal, what’s next?

    The next move could be a ratcheting up of the attacks on Chinese-listed companies in the United States.

    Friday’s rally clearly indicates that the market is happy for the moment with just a partial deal, though the Dow gave up 200 of its 500-point gain in the final half hour as markets realized there was a cessation of tariff hikes set for Tuesday but no clear timeline for removal of the existing tariffs.


    UBS’ Art Cashin is doubtful that the good feelings will last. “I don’t think this gets us to Christmas,” Cashin said. “I think it could be a temporary truce that wouldn’t last very long.”

    This partial deal, Cashin said, does not change the longer-term narrative of lower growth for 2020, nor does it end the trade wars.
    Others agree. “The trade war is one channel. The U.S. will still press forward and confront China in other areas,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “The cold war will not go away just because there is a truce in the tariff war.”

    “Tariffs have been the tip of the spear in Trump’s trade wars,” Chris Krueger, senior policy analyst at Cowen, said in a recent note to clients. “The next fronts — capital flows, [more] export controls, supply chain duress, industrial policy — are the global plumbing of the real economy.”

    The impact of this next round in the trade wars, Krueger said, “can produce exogenous shocks to the global system that can dwarf the tariffs.”
    China’s accounting issues

    Another issue that will likely be part of the U.S. toolbag to continue to pressure China: accounting.

    In June, Sen. Marco Rubio and several other senators introduced a bill to delist firms that are out of compliance with U.S. regulators for a period of three years, with a particular emphasis on China.

    The reason: Chinese firms are forbidden by their government from sharing information from their auditors with U.S. regulators.
    “Our capital markets are the deepest and the most liquid in the world, but we have high standards for exposure and transparency in order to protect investors from fraud,” Rubio said on CNBC this week. “And it is very simple: If Chinese companies want access to U.S. capital markets, they should follow our laws the way American companies have to follow their laws over there.”

    Chinese firms do release their audit reports to the public for U.S. public companies. However, Torrie Miller Matous, director of external affairs for the Public Company Accounting Oversight Board, said the issue is what they can see behind those audit reports. “Because of the positions taken by Chinese authorities, we are precluded from inspecting the audit work behind the publicly issued audit reports,” she said.

    All foreign companies that list on U.S. exchanges must have their financial statements audited by an independent auditor.

    Multinational companies are generally audited by firms in their own country. This is true regardless of whether the firm listing in the U.S. is based in China, Russia, Turkey, France or anywhere else.
 
arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.