Suddenly, the narrative is overtly positive. Everything is apparently in the “sweet spot”.
Just ask one Chris Weston, head of research at Pepperstone Group Ltd., who Bloomberg quoted on Monday afternoon. “The sweet spot for global equities looks even more pronounced”, he said in a note. “The current debate is not whether you are bullish, but whether there is too much short-term euphoria”.
That’s right, we’ve hit “euphoria”, just over two months on from a collapse in long-end yields dramatic enough to signal the end times.
The latest good news headline came on Monday evening, when the Financial Times said Trump administration officials “are debating whether to remove some existing tariffs on Chinese goods as a concession to seal a partial deal”.
Specifically, the US is said to be pondering whether to roll back the levies put in place on September 1.
That would be the duties on $112 billion in Chinese products, which were included in the August 1 escalation. Those goods were initially set to be taxed at 10%, but Trump increased the rate to 15% following a Twitter meltdown on August 23, when China retaliated and Jerome Powell didn’t say what Trump wanted to hear in Jackson Hole.
That September 1 escalation would have been much more consequential, but the list of targeted goods (which comprise the remainder of Chinese imports to the US and is weighted heavily towards consumer goods) was split into two tranches on August 13 in order to avoid a scenario where the US consumer was forced to pay more during the holiday shopping season.
This comes amid rampant speculation that the administration will ultimately take the December 15 escalation off the table in order to secure the nebulous “Phase One” agreement.
If Trump were to remove the September 1 tariffs, it would be the first deescalation of the trade war.
In addition to the trade optimism, market participants are increasingly prone to taking a glass half-full approach to the data.
“The more recent improved data have contributed to the rotation continuation: last week US non-farm payrolls surprised to the upside, the US ISM manufacturing index improved with new orders ticking up for the second consecutive month and the EA manufacturing Flash PMIs were revised higher today”, Goldman wrote Monday afternoon, adding that “US consumption remained strong in Q3 and our economists expect this to continue as the increase in stock prices should boost consumption via wealth effects, lower interest rates should boost demand for durable goods, and the combination of lower oil prices and solid wage growth could provide a boost to real income”.
Again: the narrative is now overtly positive. And that’s reflected in a demonstrable rotation from safe assets to risky assets since mid-August.
As you can see there on the right, global growth expectations are moving in lockstep with China proxies. In fact, as Goldman went on to say on Monday afternoon, “the 3-month correlation of our Global growth factor with China proxies is now at an all-time high”.
The better the news on the trade front, the more optimistic market participants will be on China. And that could well fuel the ongoing preference for risk.
Now, how long before the White House denies Trump is considering the removal of tariffs?