Markets may be underestimating US-China trade war risks

Stocks on Wall Street climbed higher this week due in part to increased hopes for a U.S.-China trade war resolution — but Blackstone's Joseph Zidle warned that investors might be too optimistic. Zidle, chief investment strategist at the asset management firm, said the trade war will likely drag on much longer than what investors are currently expecting. That means the impact on the economy and financial markets could be "bigger than most people think," he said on Friday. "The markets are really pricing in Goldilocks: they're pricing in more Fed cuts and some sort of positive resolution to trade. I just think that, at this point, sentiment is excessive," Zidle told CNBC's "Squawk Box." "I think both the United States and China are preparing for a much longer, a prolonged and drawn out period of uncertainty," he added. His comments came after the Dow Jones Industrial Average recorded its seventh straight day of gains on Thursday, while the S&P 500 and Nasdaq Composite climbed for the third consecutive day. Global trade is really complicated, it's complex and it's intertwined ... The unintended consequences of trade wars and currency wars I think are hard to understand. My guess is they're going to be bigger than most people think.

Trade war consequences

The U.S. and China have since the beginning of 2018 slapped tariffs on each other's goods worth billions of dollars. The trade war has hurt business sentiment and slowed down import and export activity globally. The International Monetary Fund said on Thursday that tariffs imposed by the two countries could shave 0.8% off global economic output in 2020, with potentially more losses in the following years, according to a Reuters report. In response, U.S. Treasury Secretary Steven Mnuchin said he hasn't seen the new IMF forecast, but he doesn't expect the impact on America to be as significant, Reuters reported. Zidle said the trade war could bring about "unintended consequences" that many may not be aware of right now. He explained that many companies have set up complex production chains that spread across a large number of countries. So, the exact impact of a trade war is difficult to quantify, he added. In addition, Trump could still extend the trade war to other economies such as Europe and Mexico — which would put more pressure on financial markets, the strategist said. "Global trade is really complicated, it's complex and it's intertwined," he said. "The unintended consequences of trade wars and currency wars I think are hard to understand. My guess is they're going to be bigger than most people think." Read the full article

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The market's trip to new highs is different this time

Strength in semiconductors and a whole host of other sleeper stocks is a telling sign that the market will not only make it to new highs but could remain in an uptrend, according to technical analysts. For a couple years, investors could simply look to the performance of the favorite FANG names — Facebook, Amazon, Netflix and Alphabet — for clues to market performance, but now the fact that a broad range of stocks are being swept higher is a very positive sign. "This is different than the past few moves back to highs. You have a bigger base. When you have one group that's leading and everything else is left behind it's easy to lose that one group, and you hit an air pocket," said Scott Redler, technical analyst and partner with T3Live.com. "When you have a lot of groups and they're taking turns, it's harder to break the back of the bull." The S&P 500 ended Thursday at 3,009, up 8, and just 0.6% away from its all-time high. The Dow, which is also less than a percent from its high, ended at 27,182, up 0.2%. The S&P's high from late July was 3,027.98, and Redler said it would be a positive if it can continue to hold above the psychological 3,000 level. The small-cap Russell 2000 ended off by less than a point at 1,575, but it is up 4.6% for the week, in its best weekly performance so far since January.   Stocks are powering higher amid positive developments in the trade wars, with U.S. officials preparing to meet Chinese counterparts next month. Analysts have said the market's run higher could be disrupted if there is negative news on the trade front. For now, both the U.S. and China have held off on some new tariffs in a show of good faith. Trading in recent sessions has been markedly different than in other phases of the bull market. Value stocks, or those less loved and with lower price-to-earnings ratios, have been gaining favor. At the same time, the momentum stock winners underperformed, though some are moving higher after falling at the beginning of the week. "I think the general view out there is growth and value are mutually exclusive ideas. I disagree. I think they can work in tandem," said Chris Verrone, Strategas Research head of technical strategy. "We call that a broader market." A number of those momentum names were higher Thursday, including Visa, up 2.3%, and Mastercard, up 2.4%, and the iShares Edge MSCI USA Momentum Factor ETF was up 1.4%. At the same time, the iShares S&P 500 Value ETF IVE had been moving opposite momentum, but it was slightly higher in afternoon trading. Some strategists say the big rotation, which was not so obvious in Thursday's trading, was kicked off by the belief that interest rates are rising after finding a bottom this summer. The 10-year yield Thursday was at 1.78%, just weeks after hitting a low of 1.42%. Yields move opposite price. In the recent past, when the stock market returned to highs, it was led by FANG, Redler said. "This time tech and FANG are kind of in line and not a headwind," he said, "but it's the broad-based nature of the value names, small caps and banks that lifted the S&P to play catch up, and lifted it back to its highs." "Now in order to power above it, it's time for FANG to wake back up. Semiconductors are considered the backbone of tech. The semiconductors are giving clues that things aren't so bad and China is still ordering, and there's the potential for a deal ... Semis are the backbone of tech, and FANG is the heart of it," he said. Frank Cappelleri, executive director at Instinet, said the best-case scenario for the market is for the momentum laggards from earlier in the week to join the value and other stocks that are moving higher. He said the software sector is a key group to regain ground. Microsoft was up 1.4% Thursday after getting knocked down earlier in the week. "I think you always have to watch tech, how semiconductors are doing going forward. SMH has quietly gotten back to its highs of the summertime," said Capelleri. "If you looked at what happened last year, they lagged since March of 2018."

Source: Instinet Cappelleri said in a week where momentum got hit so hard, the sector "was stubborn in terms of not losing its bid." SMH was up 2.6% for the week and is now up 7.1% for September so far. "The semis have been quiet for months, but over the last two weeks they're making all-time highs," said Verrone. "Really over the last two years they've been sideways and ... over the last couple of weeks they've been waking up." Verrone said the leaders in the group are behaving well, as the sector reasserts its market leadership. "Texas Instrument and Taiwan Semiconductor are big global bellwethers that behaved resoundingly well, despite what many people believe is a tense trade and global growth environment," he said.   Verrone said the two chip names are part of a handful of stocks he is watching to gauge the market's health. The others are Alibaba, J.P. Morgan and Apple. "Two weeks ago, they had these bank stocks on the ropes. The referee was about to stop the fight. But the way they've come back from that is impressive. J.P. Morgan, in particular, is literally on the doorstep of a new all-time high," he said. "They had every opportunity to just finish that one off a couple of weeks ago. They couldn't keep it down." Alibaba, Chinese e-retailer, is at the center of the trade conflict. "It's ground zero for the Chinese consumer stocks and growth," he said. Apple, a U.S. tech and consumer bellwether, has also been behaving well, and was up for three days around a product announcement of new iPhones and iPads. That is unusual for the company's shares, which often sag around product announcements. Verrone said Wall Street's current lack of love for the one-time darling is a positive for a further move higher. "Apple has the fewest number of buy ratings from the sell side at any point in about a decade," he said. "All during the summer you saw all the analysts capitulate," he said. Verrone said he expects the market to continue moving higher and the S&P 500 to reach 3,150 by the end of the year. Besides the strong behavior of those select stock names, Verrone said, there are plenty of other positives. "I just can't remember a time when the divide between perception and reality has been so wide," said Verrone. "People have been very uncomfortable all summer, but the stocks don't act bad. That tells us the market is heading higher." Improvements in such indicators as the advancing shares over declining is also a good sign for further gains. Verrone said earlier this week the percent of stocks with an upward sloping 200-day moving average is the best of the year so far, and new highs are show up in transports, discretionary and banks. "A breadth surge over the last two weeks is as good as anything we've seen in the days and weeks coming off the December 2018 lows," he said. "That's true in Europe and domestically as well." Read the full article

Special chart suggests the market is starting a hot streak

Bespoke Investment's Paul Hickey believes a market hot streak is unfolding.The independent market researcher is building his bullish case by zeroing in on the Citi Economic Surprise Index, which is built to measure optimism in the economy. In the week ending Friday, the index flipped into positive after spending more than 100 days in negative territory. Hickey contends the move suggests investors are feeling more confident about the economy's direction, so there's a good chance stocks will rip higher.

"There are five prior periods that we're talking about. One, three and six months later, the S&P was higher four out of five times," Hickey told CNBC's "Trading Nation" on Friday. "When we looked at when these prior streaks have ended and expectations have been ratcheted down enough, the market actually did quite well going forward."Hickey is emphasizing the trend because the gains are pretty significant.When the index went negative for at least 100 days, he reports the S&P 500's median gains were 4% over the next month, 6% three months later and 8.5% six months later.And, stocks may be well on their way.The S&P 500 and Dow are closing in on their all-time highs again. They're now less than 2.5% away and ended the week above their 50 day moving averages.Stocks picked up momentum after President Donald Trump indicated trade talks with China were getting back on track, and economic data exceeded expectations."When it's such a foregone conclusion in that the economy is weakening and the stock market is going to go down, that's usually when you have the best times to catch a rally in stocks when sentiment is all looking the other way," Hickey said. Disclaimer Read the full article