Wall Street is unanimous in their belief in another truce. The best case scenario is also their base case scenario.
“The “best case” for this G-20 is a similar outcome to the last"
"...While both leaders appear open to a truce, they have hardened their positions ahead of the talks, leaving it unclear how the United States and China will resolve the tensions that have thrust the world’s two largest economies into conflict...There are still big substantive issues to resolve...I don’t know how you make a deal in the next year and a half that changes the direction of the U.S.-China relationship.”
“They want to make a deal more than I do,” Trump said. “The Chinese economy’s going down the tubes.”
There is a strong belief in China — both inside and outside the government — that Mr. Trump needs a deal more than Mr. Xi, given the 2020 election."
This society is no stranger to groupthink complacency and mispriced risk. Three years ago this week, markets rallied hard into the Brexit vote under the assumption that a "remain" victory was a lock. When the "leave" camp won, global markets shit a brick. The S&P futures were limit down overnight. And again, later that year, markets rallied ahead of Clinton's locked win. Only to be shocked by Trump's victory. Limit down. Of course, subsequently markets went vertical on the prospect of tax cuts.
Now we will find out if that initial sell instinct was correct.
Based upon (over) valuation and collapsing fundamentals alone, Goldman puts the risk of a crash at 60% - the highest since the Global Financial Crisis. That doesn't include any additional impact from trade war escalation.
Semiconductors are ground zero in this trade war, with China demanding that the restrictions on Huawei be lifted.
Semis are finishing up a three wave rally ahead of the meeting:
Via Reuters:
“Chipmakers are a proxy for trade optimism”
“They have become the trade du jour for traders betting for or against a trade deal”
Any questions?
Momentum gamblers still haven't figured out the party is over:
Don't try this at home
You know you're an optimist, when:
The global carry trade has flash crashed three times in the past several years: Brexit vote, Trump election, G20 selloff in December. Since last week's FOMC, the USDJPY pair have been trading lower along with bond yields.
Oil futures algos have already priced in a trade agreement, despite substantial downside risk:
"A further deterioration in relations between the U.S. and China could set off a chain of events that would push oil down more than 50% to as low $30 a barrel, according to Bank of America Merrill Lynch."
That may cause Chinese authorities to let the yuan weaken, making oil that’s priced in dollars more expensive in the world’s largest importer and stunting demand growth, he said. Beijing might also decide to ignore Washington’s sanctions against Iran and resume crude imports"
"It was a triumph of denial over reality"
"Investors poured $14 billion into US equities last week, the most since March of last year"
investors essentially shrugged off meaningfully weak economic data that has been plaguing key US regions, like the Empire State Manufacturing Index posting its largest decline in nearly two decades "
The VIX has been rising in tandem with the market. We haven't seen that since January 2018:
June 26th, 2019
Stock Funds Post Largest Two Week Inflows Since The Election
