Saturday, September 7, 2019

Markets Soar Higher, The Trade Wars Are Over?

Treasury yields are up, stocks are up and everything is peaches and cream once again. The trade wars are apparently over? All geopolitical risks have dissipated over night?

Of course not.

The market is reacting to positive news coming out from both China and the United States, that is indicating that both sides are willing to resume talks next month and are once again willing to return to the negotiating table in regards to the ongoing trade wars.

Leading up to next month's talks, high level officials on both sides are expected to lay out the ground work via various meetings and phone calls, in anticipation of the October meeting.

As reported by the New York Times;

Liu He, a top Chinese economic official and Beijing’s top trade negotiator, will travel to Washington in early October, state media said. Mr. Liu spoke on Thursday morning with Robert E. Lighthizer, the United States trade representative, and Steven Mnuchin, the United States Treasury secretary. Mr. Lighthizer’s office said that deputy-level meetings would take place ahead of the talks.

Of course, this has caused the markets to react in a bullish manner, with the S&P shooting up by over 40 points at the time of writing, or 1.37%, while the DOW Jones, not to be outdone, propelled higher by 1.69%, or 444 points.

Meanwhile, both gold and silver were hammered lower by the news, taking significant hits.

(Gold Price, Chart Source)

(Silver Price, Chart Source)

Gold is currently down by $30.72 per ounce, while silver has fallen by $0.29 cents per ounce.

The market is signalling that the threat of a continued trade war is greatly diminished and the need for protection is lessened, however, one day's worth of trading does not make a trend and the trend is still quite positive for precious metals.

Gold still remains strongly above the $1500 support level, while silver stubbornly remains above $18 per ounce.

Unfortunately for the markets as a whole, I believe that this is nothing more than jawboning from both sides, as it is incredibly unlikely at this point that either side will make any major concessions in next month's meeting.

China cannot afford to back down and neither can President Trump with the 2020 elections just over the horizons. Neither side can give off the appearance of weakness, regardless of the damage that it does to their own economies.

However, both sides would love nothing more than some reprieve in the short term from the pain their economies have been feeling as of recently and both sides do not wish to head into the holidays with people and businesses fearing the worse, clutching their wallets tightly.

Spending is paramount in this consumer driven world and both countries GDP's depend upon it, with one side predominately selling the numerous, largely useless, trinkets and the other buying them.

Already the United States has imposed massive tariffs on Chinese goods entering into the country and plans on enacting even more before next months meeting, antagonizing Chinese officials even more.

China of course has retaliated as well, however, they are taking the brunt of the damage, as they rely so heavily on exporting goods to the United States.

It is already expected that China's GDP is going to be 1.6% lower throughout the course of 2019 as a result of the ongoing trade wars, which is a massive move lower.

The IMF has also revised world growth, lower as a whole, as a result of these ongoing trade disputes.

South China Post reports;

"Higher tariffs and rising trade barriers will weigh heavily on the global economy, apart from the US and China, especially through its impact on confidence and financial conditions. According to model simulations, a full-blown trade war would cause the global economy to slow by more than 0.8 per cent in 2020, with growth remaining roughly 0.4 per cent lower in the long term, compared with a baseline without trade tensions."

Who knows what next month will bring, who knows if a resolution is in order? Anything is possible, however, I wouldn't hold your breath.

I believe that neither side is yet willing to buckle under the pressure, I believe that things are going to get worse before they get better and I believe that the trade wars will continue on, for many months yet to come.

The risk remains, the need for precious metals remains. Keep stacking and ignore the noise.

- As first seen on the Sprott Money Blog