China/U.S. Trade: Finding A Signal Amidst The Noise

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By Jeff Miller :

The celebration of the Trump/Xi dinner in Buenos Aires lasted about three hours. What went wrong? This reaction was not a complete surprise, but the size and rapidity were attention-grabbing.

The market reaction fits the description I suggested in May: Trading, Fast and Slow . A small piece of news leads to a cascade of trading - algorithms trained to watch for key words, humans making a short-term directional play, technicians noting the "violation of key support or resistance," and the subsequent media explanations. This confers an undue legitimacy on noise - tidbits of news without any context.

Here is how it plays out on the China/US trade story. In each case, let's try to separate trading "fast" reactions from trading "slow."


Fast - Traders

Slow - Investors

G20 Meeting

Not specific enough.

Reasonable outline with some initial agreement.

90-day Deadline

Too many issues to resolve in 90 days. No firm schedule.

A deadline is needed to prod negotiators. Extensions are possible, even likely, and that is fine.

Posturing, tweets and comments

Demonstrates a lack of trust and commitment.

Business as usual - will continue for 90 days.

Arrest of Wanzhou

Tactical effort by the U.S. to gain leverage. Timing (same day as the dinner) undermines confidence.

A separate policy path related to Iran. Preceded dinner plans, so the trade impact might not have been considered. The timing was a coincidence of travel schedules.

Differing communications from US and China

Shows lack of real agreement and the poor prospects for an eventual deal.

Shows why a dinner meeting is not a way to draft policy. A joint communique requires advance work by staff.

Prospects for avoiding an all-out trade war


An encouraging first step.


This is a typical example of the trading community's failure to understand politics, negotiation and compromise. I have highlighted this before on issues like Greece and the asserted collapse of Europe and concerning various US policy debates.

Here is what we should expect:

  • Decades of history will not be reversed in a few months. Be happy for some progress.
  • The outcome will be a compromise. It will not be a complete success for either side, but each will trumpet what they have accomplished.
  • Nothing big will happen until the last minute. This is the way that partisans demonstrate they have accomplished as much as possible.
  • Eventual relief on the most important reciprocal tariffs.
  • Some progress on the intellectual property issues.
  • Some immediate relief on existing boycotts, e.g., soybeans.

I expect significant improvement from current expectations for two reasons:

  1. It is in the interest of all. Political processes gravitate toward these outcomes.
  2. Trump supporters are feeling the pain and will exert increasing pressure for a deal.

Long-term investors should emphasize legitimate signs of progress or failure, avoiding the false drama of the daily "explanations."

See also Silver - All Quiet Before A Storm? on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: SPY , QQQ , DIA , FXI , IWM

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