My Reason Why the Bulls Will Likely Rule If This Happens

My-Reason-Why-the-Bulls-Will-Likely-Rule-If-This-Happens
iStock.com/Dilok Klaisataporn

The Extension of the Bulls Is Highly Dependent on China

For those of you who believe that the economy is rock-solid and doesn’t require a trade deal with China to be consummated any time soon, just take a look at what materialized on the final two trading days of October and the first day of November.

While the Chinese stock market is fighting the bear, the upside potential is massive for Chinese stocks if a trade truce is announced.

Chart courtesy of StockCharts.com

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Simply look at the stock market reaction of Chinese stocks on November 1, where we saw many Chinese stocks surge eight percent and higher.

The stock market displayed its underlying belief that a resolution—or at least some progress toward that resolution—to the escalating China risk would be beneficial to American companies and consumers.

The blue-chip Dow Industrials—a reflection of big U.S. multinationals—rallied over 800 points in the three-day period to November 1.

The buying was not about earnings, the midterms next week, or yields. The buying in the stock market was about de-escalating the China trade risk before the next round of tariffs on the final $267.0 billion of Chinese imports takes hold in February 2019.

The reality is that trade wars are not easy to win. Countries on both sides will suffer. The global economy will suffer. Plain and simple.

President Donald Trump used the expanding stock market divergence between U.S. and Chinese stock markets as a reason for winning the trade war.

But now, with the U.S. stock market under the recent selling pressure that drove the Nasdaq, Dow, S&P 500, and Russell 2000 into correction territory, the White House may be changing its tune a bit in order to prop up the stock market.

Why a China Trade Deal Will Likely Extend Gains

Trump tweeted out that he had a “long and very good conversation” with President Xi Jinping, which naturally led to stock market optimism and buying.

Trump and Jinping are set to meet at the G20 gathering in Argentina at the end of November.

There is no guarantee that any deal or progress will be made. A failure to extend talks on a trade deal would likely see the stock market shift back to the downside.

In my view, the prospects of a trade deal will come down to how much pain each country would want to endure in the absence of a deal.

China is clearly hurting more and needs a deal.

The U.S.—with China hawk Peter Navarro and John Bolton whispering in Trump’s ear—would want a dangerous, dragged-out, economic war of attrition.

How the stock market behaves in the near and immediate term will depend on who Trump is listening to.

But at the end of the day, a continuance of the stock market’s upward move will likely only occur if the U.S. and China can co-exist in the global economy.

Analyst Take

Just track the stock market moves with the news about the U.S.-China trade situation and you’ll see a close correlation.

It’s that simple, but the two countries achieving a suitable trade deal that counters China’s growing economic and political ambitions will not be easy.