Stocks, Crude and Trade Talks – Where We Stand Before Next Week’s High-Level Meetings

This week’s price action in the U.S. stock and crude oil markets suggests that solid earnings may be enough to keep the stock market buoyed and the OPEC-led supply cuts are enough to underpin crude prices. However, investors are getting antsy with the markets holding in a range. They like to see price change. Furthermore, volatility is likely building which could set off a strong move in either direction, depending on the outcome of the trade talks scheduled for January 30-31.  
James Hyerczyk
US-China Trade Talks

After approaching highs not seen in over a month due to the hopes of a trade deal between the United States and China, stocks and crude oil have gone into sideways mode in reaction to this week’s mixed news about U.S.-China relations. Although this week’s events have not been bearish per se, they have brought some fear and uncertainty to the forefront which has some of the bulls to take pause and reassess the situation.

Optimism Early

Both stocks and crude oil hit 2019 running. Coming off of multi-month lows hit in late December, the two markets posted solid gains the first 2 to 3 weeks of the new year on the back of reports about positive developments from the mid-level trade talks in Beijing between the United States and China.

The outcome of the talks was positive enough to generate the scheduling of a second round of higher-level talks in Washington on January 30-31.

Additionally, according to reports on January 18, China had extended an olive branch to the U.S. in an effort to bring a quick and orderly end to the on-going trade dispute. Both Bloomberg and CNBC reported late last week that China had offered to increase imports from the U.S. by more than $1 trillion over the next six years. At this rate, the U.S. trade deficit with the world’s second largest economy would be completely eliminated by 2024.

Furthermore, the Wall Street Journal reported that the U.S. is considering lifting some or all of its tariffs as a way to smooth negotiations so that a deal can be reached before March 1 when the U.S. is likely to raise tariffs on many Chinese products. Stocks and crude oil rallied on the news, but gave back some of their gains after the Treasury Department denied the report.

Sentiment Shift

Positive sentiment began to shift early this week after a report from the Financial Times, which was confirmed by CNBC sources, said the high-level meeting between the U.S. and China, scheduled for later this month, had been cancelled by United States officials. The report went on to say that the reason for the cancellation was due to the lack of progress in a discussion on forced technology transfers and structural reforms to China’s economy.

Both U.S. and Chinese officials denied this report, but it essentially created enough uncertainty to stall the rallies in both stocks and crude oil.

Later in the week, U.S. Secretary of Commerce Wilbur Ross created even more uncertainty when he said that the two economic powerhouses still have long way to go before they can resolve a months-long tariff dispute.

“We would like to make a deal but it has to be a deal that will work for both parties,” Ross told CNBC. “We’re miles and miles from getting a resolution.”

Ross further added that the Trump administration would need to impose “structural reforms” and “penalties” before Washington could resume normal trade relations with Beijing.

Stock, Crude Oil Rallies on Hold

This week’s price action in the U.S. stock and crude oil markets suggests that solid earnings may be enough to keep the stock market buoyed and the OPEC-led supply cuts are enough to underpin crude prices. However, investors are getting antsy with the markets holding in a range. They like to see price change. urthermore, volatility is likely building which could set off a strong move in either direction, depending on the outcome of the trade talks scheduled for January 30-31.

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