E The S&P 500's YTD Rally Is More A Function Of Liquidity Than Earnings Results And Sentiment

The S&P 500 (SPX) and its peer indices have had quite the bullish move off of the Christmas Eve 2018 lows and finished last week with it’s strongest daily move of the week. Technically speaking, the S&P 500 has repaired a good deal that had broken during the 20% drawdown, which occurred during the Q4 2018 period. With the rally from the week that was, the S&P 500 is officially out of bear market and correction territory, but still within a period of “correcting”. As far as the technical perspective of the S&P 500 is concerned, until the benchmark index achieves a new high it is defined as lingering in a corrective period within a cyclical bull market. So let’s take a look at what drove the markets in the week that was.

On Tuesday, the Brexit vote failed, but equities closed out the day with a 1% advance and closed near the highs of the day. A no-confidence vote was held by the British Parliament the next day, for which Prime Minister Theresa found favor and remains driving the Brexit path forward, but without consensus and in a state of flux.

There are only a few options that seem to be in reach for the U.K., but more importantly is the coordination and agreement with the European Union. An agreement between the U.K. and the European is the biggest sticking point and impetus for increasingly signaling a second referendum. A no-Brexit scenario is the most feared by global markets and in order to stave off such a scenario, a second referendum may be the only rational path forward for the Prime Minister and the nation.

With Brexit issues in search of new and more favorable headlines some weeks out, equity markets have side-stepped concerns in favor of potential trade deals. Let’s face it; trade has been the biggest worry for investors throughout 2018 and remains as such given the uncertainty that comes without resolving trade disputes between China and the United States. On Thursday, headlines surfaced on the trade front and proved favorable despite the dueling narratives.

Trade Headlines Boost Equity Appetites

U.S. officials have been reportedly debating lifting tariffs on Chinese imports to give Beijing a reason to make deeper concessions in ongoing trade talks between the two countries. Treasury Secretary Steven Mnuchin proposed lifting all or some of the tariffs, The Wall Street Journal reported on Thursday, citing people close to the matter. The goal is to push forward trade talks and get China’s support for longer-term reform.

Shortly after the Wall Street Journal reported on the subject matter, White House officials refuted the idea of lifting tariffs. A senior administration official told CNBC’s Eamon Javers that “there’s no discussion of lifting tariffs now.” The official, who participated in a trade meeting at the White House on Wednesday, told CNBC that President Donald Trump “has no interest in making decisions now.”

President Donald Trump said on Saturday there has been progress toward a trade deal with China, but denied that he was considering lifting tariffs on Chinese imports.

“Things are going very well with China and with trade. If we make a deal certainly we would not have sanctions and if we don’t make a deal we will. We’ve really had a very extraordinary number of meetings and a deal could very well happen with China. It’s going well. I would say about as well as it could possibly go.”

Finom Group is of the opinion that the initial reporting from the Wall Street Journal is closer to the truth than what is being refuted by the White House. What we’ve seen in the past is that news breaks on trade initiatives that are played down by the White House officials thereafter and then the original trade initiatives actually take place (for better or for worse). We’ve seen this type of “good cop-bad cop” commentary from headlines and White House officials throughout the trade saga. A thoughtful analysis would suggest that the initial reports are accurate, but the White House desires to maintain the upper hand in trade negotiations. In order to achieve this goal, whereby a tough façade on trade is maintained, the White House either refutes or lowers the temperature of the positive trade headline. Additionally, should the potential offering (lowering/removing tariffs) prove a failed negotiation, disappointment won’t find new depths from equity market participants.

What makes the analysis above that much more compelling is the fact that not more than 24 hours later there was headlines from the other side of the trade negotiation. China has reportedly offered a six-year boost in imports during its ongoing talks with the United States. Chinese officials made the offer during negotiations in Beijing earlier in January, Bloomberg News reported. China would increase its annual import of U.S. goods by a combined value of over $1 trillion, the officials told Bloomberg, which was first to report on the import boost offer. China pegged its proposal to buy more U.S. goods through 2024.

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