This Morning’s Log Entry

Broadcom’s forecast downgrade, due of course to trade war concerns, has tech selling off a bit this morning. China’s very weak industrial data from last night has the market jittery as well. Not helping matters, ironically, is decent U.S. industrial production and retail sales (both data points released this morning). The latter challenges the notion that the Fed needs to step in and cut interest rates right here.

Clearly, the stock market is not discounting the risk in the tone of the latest rhetoric. If indeed Trump means what he says – that tariffs ramp up if he doesn’t get what he wants out of the G20 meeting later this month – and he doesn’t, stocks will absolutely tank! Commentary out of China comes across very firm; i.e., without cancelling new tariffs, without the U.S. backing away from dictating China’s economic policies going forward, and without softer language than what apparently exists in the latest draft, they won’t deal.

The potential for miscalculation is huge. Traders understand the huge economic, and, thus, the political risk of miscalculation, and, therefore, simply can’t fathom a no-deal scenario. And/or they believe that – even in the worst trade case – the Fed can ultimately save the day. 

While I expect a very sharp rally on the first Fed cut, if traders indeed are betting on the Fed being able to circumvent the economic fallout of a no-deal scenario, they’re simply dead wrong.

Huge volatility (both directions) to come!


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