Week Ahead: Focus On Trade Keeps Outlook Sunny, But Storm Clouds Are Gathering

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This morning, as I was doing my usual early Monday morning recap of news and markets, I had a familiar, nagging feeling. It was a feeling that I have come, over the years, to regard as worrisome. I felt that the market was completely missing something important. That worries me because I learned a long time ago that the chances of the collective wisdom of some of the smartest people on the planet being completely wrong while my immediate take is completely right are slim at best.

It is a good rule of thumb to assume when that happens that it is you, not the market, that has overlooked something. At the very least, the thing that you are focused on is simply being overwhelmed for now by something more powerful, and that looks likely to be the case this week.

The “thing” in this case is a speech given this morning in Paris by Cleveland Fed President Loretta Mester. That speech contained a phrase that, couched as it is in the cautious words and qualifications that we expect from a regional Fed President, is at its heart scary for investors.

Mester said that “we may need to move the fed funds rate, for a time, a bit above the level of the funds rate that is expected to prevail over the longer run." Given that that level of “normal” short-term rates is assumed to be around 3%, that is a somewhat daunting prospect.

You may remember that just a few short months ago the S&P 500 dropped around twelve percent in less than two weeks when the 10 Year T-Note Yield started to threaten the three percent level. Conventional wisdom then was that if the prevailing interest rate were that high, it would choke off growth.

Yet when Mester suggested casually this morning that the short-term Fed Funds rate could hit that level, futures barely moved. A Fed Funds rate of over three percent would, based on the current yield curve, imply a 10 Year yield of close to five percent, so why the collective shrug from traders this morning?

In part, the answer lies in momentum. After a sustained period of volatility, the S&P has moved higher during the trading day (giving green candles on the above chart) in each of the last eight days. Most of all though, as I suggested earlier, it is a matter of focus.

Traders and investors have had their hissy fit over the prospect of higher rates, and are now most worried about the prospect of a sustained, immensely damaging, trade war with China. The market is therefore choosing to place much more importance on other news this morning, such as Donald Trump’s promise to "Make China Great Again" that has significantly eased fears in that regard.

Instructing the Commerce Department to look out for the controversial Chinese company, ZTE, a company that has in the past been regarded as a major threat to U.S. national security, shows how far Trump is prepared to go right now to ensure positive news comes out of the trade talks with China. That, and one of the strongest earnings seasons in recent years, is what the market is looking at, and that focus on the positive continues this morning.

That is a powerful thing and, assuming it lasts, could easily take us through the February and March highs around 2800 on the S&P 500, bringing the all-time high of 2872.87 into traders’ sights. All that could come as soon as this week, especially if a few key earnings reports such as Walmart (WMT) continue the positive trend. Eventually the interest rate issue will be back in the minds of the market but for now the outlook is extremely positive, and investors should be looking to ride the wave.

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

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

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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