Can Trump and Powell Deliver on Expectations?

Risk-on trade

US markets rose sharply yesterday, and the NASDAQ Composite (QQQ) saw an upwards price action of 1.4%. Semiconductor stocks were among the biggest gainers. NVIDIA (NVDA), Advanced Micro Devices (AMD), Broadcom (AVGO), and Intel (INTC) rose 5.4%, 4.3%, 4.5%, and 2.7%, respectively. The semiconductor space came under pressure last month amid the US-China trade spat and the Huawei ban.

Yesterday, optimism over US-China trade relations and expectations of a dovish Fed lifted sentiments. European Central Bank President Mario Draghi’s comments on more stimulus also helped markets. Is the risk-on trade sustainable?

Rate cut

Markets don’t really expect Fed Chair Jerome Powell to cut rates today. However, markets would watch out for signs of further dovishness in Powell’s comments. To be sure, the Fed has already taken a dovish stance and halted its rate hike cycle. Fed officials including Powell have indicated over the last month that they are open to a rate cut if the situation so warrants. Having said that, markets might be getting a little too optimistic on the Fed. While the Fed surprised everybody by abruptly halting its rate hikes earlier this year, it might not take a very dovish stance on interest rates at least for now.

US-China talks

While the meeting between President Donald Trump and Chinese President Xi Jinping looks on track, it wouldn’t change the ground realities. The two sides look far apart on several aspects including the enforcement mechanism. While the resumption of dialogue seems to be a positive development, markets seem to be getting a little carried away on a trade deal. Furthermore, economic growth is stalling pretty much globally. Today, Japan also released dismal trade data, and a Reuters poll showed that Japanese companies are seeking stimulus as growth could falter next year and beyond.

Chinese economic data has also looked soft. Read China Might Not Admit It, but Trump’s Tariffs Really Sting for more analysis.