Odds of a trade deal - and of survival for bull market - fading fast

IN THE grand diplomatic game of "Deal or No Deal", the odds of a deal - and of survival for the bull market in US stocks - are falling fast.

Broad US stock indexes fell slightly last week as more of the bears' fears played out than the bulls' hopes, and more fears about prospects of a trade deal and economic growth could be realised this week.

The stakes were high going into the week, with the Dow Jones Industrial Average and the Standard & Poor's 500 on the brink of record highs.

The bulls were betting on a best-case scenario where the US Federal Reserve would cut interest rates by a half-a-percentage point even as the US and China make progress on trade. Instead, the Fed cut rates by a more modest amount as officials hinted that the central bank was nearly finished with a "mid-cycle correction", contrary to the bulls' hopes for an indefinite series of new cuts.

The other bearish factors in the Fed policy statement came in the form of dissents. Three Fed presidents disagreed with chairman Powell's move, with two opposing any further rate cut and one seeking a deeper cut.

The Trump administration tried to send positive signals to the market about progress on trade talks with China, as a delegation from Beijing arrived to hash out the agenda for high-level October meetings.

Old notes of discord soon intruded on the newfound harmony. Almost as soon as a report hit the tape that some of the Chinese visitors would visit farmland in the Midwest last Friday, the Chinese officials cancelled the visit.

The stocks and commodities most sensitive to trade policy, including semiconductor stocks, soybeans and hog futures, fell sharply. Some strategists noted that such a drastic response to a tweak in the schedule of mid-level diplomats proved the pivotal role that the trade war plays in the future of the stock market.

"I think the catalyst for both the economy and the market is some type of clarity on US-China trade situation," said Mr Arone. "Absent that, I expect continued volatility based on 'will we get an agreement or won't we'."

The Dow Jones Industrial Average finished the week below 27,000 after testing all-time highs above 27,300. While returns for the year to date are impressive, the blue-chip index is only 900 points above where it started 2018, a couple of months before the Trump administration formally opened hostilities.

It's rare for the broad market to move sideways for so long without breaking out to major new highs or breaking down into a bear market.

Perhaps the most bearish report from the frontlines of the trade war so far came from FedEx. The freight giant, which, like Huawei Technologies on the Chinese side, has been directly targeted in the trade war, bluntly stated that it saw weakening economic demand weighing on its growth.

While the company's decision to distance itself from Amazon may have played a role in its own reduced forecast, FedEx's view of global trade is unparalleled and cannot be dismissed.

"It had to be taken seriously because the CEO was clear about FedEx's specific issues and he talked about a global environment not necessarily just through the prism of FedEx's bottom line but in general," said Quincy Krosby, chief market strategist at Prudential Financial.

One thing that has preceded every recession in the last 30 years is an increase in oil prices. It looked like another oil spike had begun at the start of last week.

Futures in New York rose by the largest increment in recent years last Monday after the attack on Saudi oil facilities was attributed to Iranian launched drones. While the Saudi oil infrastructure recovered more rapidly from the drone attacks than would have been possible after a conventional air raid, the chances of more outages mean that oil prices are likely to remain somewhat elevated.

Another sign of investor nerves is the flight from some of the riskiest areas of the market, including tech stocks and initial public offerings. Big tech stocks such as Facebook and Alphabet had led the broad market for years. But fears about antitrust investigations in Europe and the US have led these companies to sit out recent rallies.

There are mixed signals on the IPO front, with some of the biggest unicorns left in Silicon Valley, including Airbnb, taking steps closer to the public markets even as others take a step back. The We Company, owner of co-working office developer WeWork, has postponed its IPO after critics questioned its business model.

For the stock market to steady and take another run at records, the bulls will need economic data this week to top targets. The main damage inflicted by the trade war on the US economy so far is on business spending.

The next durable-goods orders report, due out this Friday, will reveal whether corporate investment on heavy equipment remains weak.

"There's no doubt that there's a deceleration of economic growth," said Ms Krosby. "The question for the market is whether it is bottoming out."