Tetsu Emori's Real Trading Strategy April 9, 2018 08:18
Streamer: ECM
〔EQUITY MARKET〕
【Market Commentary and Analysis: U.S. Stocks and European & U.S. Bond Markets】
U.S. stocks renewed concerns over escalating U.S.–China trade tensions,and fell sharply for the first time in four days.President Trump said on the 5th that he is considering new tariffs on Chinese imports totaling $100 billion.In response, the Chinese Ministry of Commerce held an urgent press conference on the 6th and stated, “If a $100 billion tariff list is announced, we will immediately take strong countermeasures.”Market concerns over escalating U.S.–China trade tensions had retreated earlier after several senior officials, including the U.S. Trade Representative, suggested a possibility of avoidance, but as both countries hardened their positions, concerns rekindled and a risk-off mood spread, with U.S. stocks trading under selling pressure for the entire session.～
The Dow's decline widened to as much as 767 points at one point.The March U.S. jobs report showed nonfarm payrolls rising by 103,000 from the prior month, below market expectations of 193,000.However, the prior month was revised upward, so the overall employment picture was still viewed as solid and not given much attention.The pace of nonfarm payroll growth was the weakest since September 2017, at six months; the unemployment rate held at 4.1% for the sixth consecutive month.Meanwhile, wage growth picked up modestly, with hourly wages up 0.3% from the prior month (vs. 0.1% in February) and up 2.7% year over year from 2.6%.
According to Thomson Reuters, S&P 500–member companies' Q1 2018 earnings are expected to rise 18.4% year over year.So far, 23 of the 500 companies have reported Q1 earnings, and the share that beat analysts' estimates stands at 73.9%.While the long-term average is 64%, this reading exceeds that but remains below the four-quarter average of 75%; first-quarter revenues are expected to rise 7.3% year over year.For Q1 2018 earnings per share, 73 companies are expected to miss or come in below estimates, while 60 are expected to meet or beat estimates.The S&P 500's forward P/E for the next four quarters (Q2 2018 to Q1 2019) is 16.4x.
In the week starting April 9, six companies are scheduled to report quarterly results.
Trump stressed that, “The United States has already lost the trade war. We are not currently in a trade war.”On Twitter, Trump repeated that “the war was lost years ago by reckless, in other words, incompetent leaders who represented this country,” arguing the legitimacy of sanctions tied to China’s IP rights violations.He also stated that, regarding the current U.S.–China trade tensions, “we may incur some losses, but in the long run we will become stronger.”Furthermore, The Wall Street Journal reported that the Trump administration is considering tightening vehicle import rules, aiming to impose stricter emissions standards on imported cars to protect domestic manufacturers, and that Trump has instructed several agencies to draft a tougher emissions framework using existing laws.However, as of now the plan remains in the planning stage, with EPA officials working on the policy’s legal basis. Some within the administration have voiced opposition, and there are challenges to implementation.
Treasury Secretary Mnuchin said that “a trade war between the U.S. and China is possible,” while signaling willingness to engage with China to avoid a full-blown clash, and he emphasized that “President Trump is determined to defend U.S. interests,” adding that sanctions may be imposed depending on China’s response.Mnuchin said, “At this stage, the U.S. and China are not in a state of war over trade.” He also noted, “Between the U.S. and China there is a clear understanding that reducing the U.S. trade deficit benefits both sides,” and that they are cautiously optimistic about resolving the issue.He avoided specifying whether high-level talks are underway, but stated that “the United States is prepared to negotiate.”
Kudlow, head of the National Economic Council (NEC), said that, in light of the worsening U.S.–China trade frictions, “we do not intend to disrupt the economy. The U.S.-China talks will likely happen,” and he again referenced the possibility of avoiding Chinese sanctions through dialogue.Kudlow and other administration officials emphasized that the total proposed U.S. sanctions on China of $150 billion are “still at the proposal stage.”Regarding measures tied to China’s IP infringement, after the first draft was publicly released on the 3rd, China indicated retaliation with tariffs and the market briefly sold off; as a result, Kudlow and Ross and other U.S. officials have been repeatedly calming the market. However, Trump’s directive on the 5th to consider a “second round” has revived fears that could slow global growth.
U.S. Treasuries rallied as yields fell; with tensions over U.S.–China trade rising and March payroll growth undershooting expectations, government bonds were bought. The 10-year yield fell to 2.7750% and the 2-year yield to 2.2740%. The yield spread widened slightly to 0.5010% due to the decline in long-term rates.Yield spreads widened slightly to 0.5010% as long-term rates fell.Powell’s speech was not a market mover. In his first economic outlook since taking office, Powell said the probability of the need for further rate hikes to control inflation remains high, and noted that the labor market is near full employment with inflation likely to rise over the coming months. He also cautioned that assessing the impact of tariff measures on the U.S. economy is premature given trade tensions, and he pointed out that fiscal stimulus and accommodative financial conditions are supporting consumer spending and business investment, with unemployment falling and inflation likely to rise in the coming months.
He also explained that gradual rate hikes are intended to balance the risk of overheating if tightening is delayed against the risk of stalling if done too quickly.
Meanwhile, San Francisco Fed President Williams, a voting member of this year’s FOMC, said the Fed can continue gradual rate hikes over the next two years while sustaining solid growth and historically low unemployment, with confidence in the expansion continuing.Williams sees unemployment falling from 4.1% now to about 3.5% by next year and inflation likely to run modestly above the 2% target in the coming years, and Williams is expected to succeed Dudley as president of the New York Fed when Dudley steps down in June.
The euro-area financial and fixed-income markets saw yields fall as demand for safe assets rose amid renewed U.S.–China trade tensions. Germany’s 10-year yield dropped to 0.497%. ECB Executive Board member Benoît Cœuré said concerns about a trade war “will hurt stock markets, create uncertainty, and raise borrowing costs.” Also, Bank of Italy Governor Fabio Panetta urged that the ECB should continue a long period of accommodative policy, and that normalization should be approached cautiously.
【U.S. Stock Trading Strategy】
No change to the long strategy. While the potential for gains grows, prices are once again pulling back. The market remains concerned about the U.S.–China trade war.The Dow could break out of its downtrend if it surpasses 24,700, and if it clears 25,000 it could move higher with greater clarity, but it stalled just short of that level. The situation remains difficult, but the worst-case scenario is viewed as avoidable.If you can hold here without selling, you may consider buying once the uptrend begins.The market’s shift from the current “headline” of the U.S.–China trade war to earnings and fundamentals will be a crucial point. As noted above, the P/E is in the mid-16x range and not particularly expensive. If earnings expand, stock prices can rise; if earnings deteriorate due to the trade war, the biggest losers would be Trump and his administration. With midterm elections approaching, superficial populist policies will eventually stall. In essence, global trade expansion is beneficial for the United States, and this is already understood; current policy seems driven by the logic of international financial players. This is just one scenario and not the core material. Many market participants do not understand this, which is why stock prices fall. It’s natural that some companies are exploiting this, but since you know this, there is no need to panic. The United States and China are in very good shape; these measures also have a lead time before implementation, with the delay tied to the Kim–Trump summit. The outcome there will determine when to implement. Even the U.S. does not know North Korea’s response, so various tactics are being used to move the market while watching carefully. From the outset, talks remain possible even as tariff measures are announced, a typical “show” and a scripted scenario. This year the markets have moved according to the scenarios set by international financiers, and the question now is when they stop pushing the downside. April and May will bring ongoing diplomatic events, which is ideal material for them. They are likely to use this to move the markets; watching these moves calmly is essential. As repeated, April tends to be a good buying season with high expectations. All that remains is to wait for investor sentiment to improve.
As noted, April’s performance among the 12 months tends to show Dow at the top of the gain rankings, with the S&P 500 in third place and the Nasdaq in fourth. The average gains are about 1.9%, 1.5%, and 1.4%, respectively. In an election year, those figures are around 0.8%, 0.2%, and -0.1%, which is a bit soft, but many will still expect a rebound in April.
In the long run, inflation concerns or coping with them will be key. The market doesn’t seem highly alert, but rates are likely to rise gradually. Commodities, led by oil, are likely to stay firm and gradually influence CPI. Supply-side inflation will eventually become evident. Not a great omen, but major central banks are likely to move toward the 2% inflation target gradually. As Brainard has pointed out, it remains unclear whether markets accustomed to low rates can handle a sharp rise in rates. We must prepare not to be surprised by rate rises. A stock market decline would be counterproductive. Inflation rising during a growth phase is natural, but we should worry about the danger of rates staying too low for too long. The era of rising stock prices in a low-rate environment is over; rate stagnation would signal a peak in the economy. Going forward, be mindful that lower rates may coincide with stock weakness.
【Dow Jones: 2018 Range Assumptions】
Bull case: $24,236–$28,287 (year-end $27,996) / Bear case: $20,995–$25,130 (year-end $22,790)
【Dow Jones: April Range】
Bull case: $25,195–$26,351 / Bear case: $23,476–$24,904
【S&P 500: 2018 Range】
Bull case: 2,614–3,107 (year-end 3,076) / Bear case: 2,255–2,734 (year-end 2,419)
【S&P 500: April Range】
Bull case: 2,724–2,851 / Bear case: 2,529–2,691
【Nasdaq Index: 2018 Range】
Bull case: 6,747–8,375 (year-end 8,282) / Bear case: 5,348–7,199 (year-end 5,702)
【Nasdaq Index: April Range】
Bull case: 7,068–7,472 / Bear case: 6,114–6,826
【U.S. Treasury Trading Strategy】
Continue with a strategy of shorting the 2-year notes and longing the 10-year notes to bet on a flattening of the yield curve.
【Japan Stocks Market Commentary & Analysis】
The Nikkei Stock Average fell 77 points on the day, after rising the previous day, due to President Trump ordering consideration of additional tariffs on Chinese imports, rekindling fears of intensified U.S.–China trade frictions. 65% of stocks declined, 32% rose.With the U.S. stocks having risen the previous day, gains were expected, but ahead of the session Trump signaled a plan to consider additional tariffs on China, which triggered selling. U.S. stock indices futures also tumbled, fueling selling, but the Nikkei did not fall sharply and is stabilizing at lower levels. The size of the additional tariffs at $100 billion was seen as ambitious/unrealistic in some respects. Moreover, markets have become more accustomed to the U.S.–China tariff exchanges, so sensitivity to President Trump’s rhetoric may gradually fade.
【Nikkei 225 Futures Trading Strategy】
Maintain a long strategy. In Chicago, prices have plunged, dipping below 21,500 yen. In the near term, watch whether it can stabilize around 21,300 yen, but from a broader perspective, 21,000 yen is important. As repeated, unless it clearly exceeds 22,500 yen, the next move cannot be anticipated. Stock prices likely have formed a near-term bottom, but as long as markets fear further U.S.–China trade tensions, prices will remain hard to push higher. Foreign selling remains. The dollar/yen’s relatively resilient decline could support Japanese stocks. It is difficult to calculate this quarter’s earnings multiple at present, which is why buyers are cautious. Even so, if it does not dip below 105 yen, earnings declines should be avoidable. External factors remain unclear, but I want to use current undervaluation to secure any possible profits.
From prior dips and rallies, longs of around 21,750, 21,600, and 21,500 yen remain.Going forward, I plan to trim the remaining longs on rebounds to 22,050, 22,250, and 22,450 yen.Because the market has not yet broken out of weakness, I prefer buying on dips rather than chasing highs and, rather than waiting for higher levels, selling to lock in profits. If dips to 21,250 or 21,000 yen appear, I would add to long positions again.If prices go above 22,500 yen, ride the trend and add to longs.
April’s bullish scenario range is 23,256–25,002 yen, and the bearish range is 21,737–23,316 yen. To return to a bullish trend, a rebound to around 23,250 yen is needed at minimum. This is a fairly high hurdle.First, recover to the bear range’s lower limit of 21,737 yen, then see whether it can advance toward 23,250 yen.A level below 21,737 yen is considered severely oversold.
Political factors, when new information arrives, will be updated at that time.
