Stocks Rethink China Bounce

Stocks started off the day rallying on speculation that a U.S.-China trade deal was near conclusion. Market consensus was that the deal would be signed by President Donald Trump and President Xi Jinping by the end of March. The United States would lift tariffs on most/all Chinese exports and China would lower tariffs on U.S. farm goods, chemicals, and autos, and increase its purchases of U.S. goods from soybeans to natural gas.

But that rally turned into a retreat as Wall Street began to try to figure out how much of that good news is already priced in. Lending a certain negative tone to those calculations was the failure of Standard & Poor’s 500 index to sustain the move above the November high and the market’s break below support at 2800 on the pullback. As of 12:30 p.m. the Standard & Poor’s 500 was down 0.97% and the Dow Jones Industrial Average was off 1.23%. The NASDAQ Composite was lower by 1.11% and the Russell 2000 index of small cap stocks had tumbled 1.37%.

On the one hand, Wall Street is rife with analyst comments pointing to a China deal being worth 9% to 10% to global equities. That’s a 10% gain for global–and not U.S.–equities. The selling in U.S. markets began after the release of weaker than expected numbers on construction spending for December (down 0.6% instead of the 03% drop expected by economists surveyed by Briefing.com.) This is extremely backward looking data so selling on these numbers two months into the first quarter is a reflection of nervousness about the continued strength in this rally rather than a reaction to evidence of any real weakness in the economy.

I’d also note that there’s a certain amount of skepticism about those forecasts of another 9% to 10% to the upside in global equities as a result of a China trade deal. After last night’s 1.12% gain in the Shanghai Composite, the stocks in this market are up 15.63% in the last month. There are those who’d argue, and I’d be one of them, that the bump from a U.S.-China trade deal is now largely priced into Chinese stocks by that rally.

Meanwhile the decision in China to cut its value-added tax for the manufacturing sector by 3 percentage points is a reminder of continued weak growth in the Chinese economy (and the government’s belief that there is a real problem that needs to be fixed.) Morgan Stanley estimates that the reduction in the VAT is equivalent to a 600 billion yuan ($90 billion) boost to the Chinese economy. (That’s equivalent to 0.6% of China’s GDP.)

Meanwhile the big U.S. economic news is scheduled for Friday with the release of the February jobs numbers. Economists surveyed by Briefing.com forecast that the economy added a healthy 173,000 jobs in the month. That would come after a January report showing the addition of a net 304,000 jobs. One open question: Will there be a big adjustment to the January numbers as statisticians revisit their season adjustment from the holiday period .