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Will the Dow Jones Keep Trading Strong as Trade Talks Stall?

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Updated

  • Phase one trade deal continues to look uncertain.
  • With better-than-expected jobs report, Dow Jones recovered later in the week.

Phase one trade deal with China continues to look uncertain. While the December 15 deadline is just a week away, the rhetoric surrounded by trade talks continues to be full of “ifs and buts.” Larry Kudlow, the Director of the White House National Economic Council, said on December 6 that the US and China are very close to a trade deal. However, the US trade administration is ready to walk out if it did not get the wanted terms, CNBC reported on December 6. Also, the Dow Jones Index fell 0.6% in the week ending on December 6.

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Will we see phase one trade deal soon?

Both the US and China seemed on a better footing with the partial trade deal last month. The interim trade deal is important mainly due to the December 15 deadline. The US will levy 15% tariffs on $165 billion worth of Chinese goods starting December 15.

If there is no deal and tariffs were imposed as per the deadline, that will likely be an escalation of the China trade war. Interestingly, Kudlow even said that the trade deal is closer now than it was in mid-November.

Dow Jones Index marches higher

Meanwhile, markets continued to march higher. It seems like investors are only focusing on the positive indicators and ignoring the uncertainties related to the trade war. The Dow Jones Industrial Average (DJIA) (DIA) and the S&P 500 (SPY) are trading close to their all-time highs at the moment. A better-than-expected employment data boosted the markets on Friday. The Dow Jones and S&P 500 are up approximately 19% and 24%, respectively, so far this year.

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We have been hearing from trade representatives that the talks are going very well in the last several weeks. However, the differences between both parties are also on the rise. The Wall Street Journal reported on December 5 that the US wants China to purchase $40 billion to $50 billion of farm goods every year, irrespective of the market conditions. That’s way higher than China’s farm purchases of $8.6 billion last year.

Is the trade deal really close?

Interestingly, the US wants to minimize its trade deficit with China with its agricultural goods. While farm products remain at the center of phase one, China has wavered on pledging to any specific amount of agricultural buying.

Last week, the uncertainty of the trade talks increased after the US passed a Hong Kong Human Rights bill into law. China sternly criticized the US’s actions saying it is interfering in its internal matters. China said, “We advise the U.S. not to act arbitrarily, or else China must firmly counteract, and the U.S. must bear all resulting consequences.”

Dow Jones Index moving averages

The weakness earlier this week pulled the Dow Jones Index approximately 0.5% off from its record highs. It is currently trading 3% and 6% above its 50-day and 200-day simple moving average levels, respectively. The fair premium to both these key support levels indicates strength in the index.

Its 50-day level close to $27,292 might act as a support for the index in the short term. The index’s 14-day RSI (relative strength index) was close to 60 as of December 6. This indicates that the index is approaching the overbought zone.

The rhetoric around the trade talks will likely be the important driver for the markets this week. However, the broader market indexes will probably trade volatile until we see the phase one deal.

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