Markets were spooked last week as President Trump publicly called out China on the two nations’ work towards a trade agreement and announced the imposition of further tariffs on Chinese imports. This pushed the market into a “risk-off” mode, hitting stocks and boosting safe-haven assets such as the Japanese Yen.
Friday brought a little relief for risk bulls, with the S&P 500 Index recovering by a heathy 60 points or so, boosted by news (delivered from President Trump’s twitter account) that Friday’s negotiation between the parties had gone well. Unfortunately, it seems that this positive news was premature, with Chinese Vice Premier Liu He publicly taking a tough line in a media interview over the weekend. Stocks and other risky markets now seem likely to open with a gap down.
The problem with trading a risk-off, bearish market which is driven by a political event such as the trade dispute, is that any position can be blown out of the water in seconds on the surprise announcement of a solution. At any moment, the U.S. and China can agree a solution to the dispute, and the instant that happens you can expect safe-haven assets to sell off and for the U.S. stock market to jump and rise strongly, at least for a day or two.
That doesn’t mean that you can’t trade with the sentiment profitably while it lasts, using tight stop losses to limit your maximum possible loss, even if you might get some significant slippage if you are unlucky to be caught in a position when an agreement is finally announced. Long Japanese Yen and short stocks and commodity currencies will probably be the most fruitful places to seek risk-off trades in line with the short-term trends.
While we can probably expect an eventual resolution of the trade dispute and bulls back in the driving seat in the stock market, the Chinese are now making a bigger issue about the trade imbalance between the two countries, with the U.S. insisting that China buy more U.S. goods.