Fed Pledges Economic Support, Sending Equities Soaring

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Risk appetite has improved into the middle of the week with US equities posting a strong recovery yesterday, following the heavy declines of last week. The recovery came in response to comments made by Fed chairman Jerome Powell in Chicago yesterday. Powell noted that the Fed would ensure that the US maintained its current economic expansion if the economy started to suffer as a result of Trump’s trade war.

Powell Addresses Trade War Concerns

Commenting on the ongoing trade tensions, Powell said

“We do not know how or when these issues will be resolved… We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Market Expecting Rate Cuts

Although Powell didn’t explicitly mention such action, the market interpreted these comments as meaning that the Fed could move to cut rates if it deemed it necessary in a bid to backstop the economy.  The Fed has acknowledged the risks from Trump’s trade war consistently over the last year and a half. They have often noted the uncertainty it contributes to its outlook.

With the trade war having escalated again recently, the Fed will no doubt be keeping a close eye on incoming data to judge the impact of the tariffs. Data released this week showed that US manufacturing hit its lowest level of the last ten years over May.

Trade War’s Raging

Trump’s trade war is now raging on all fronts. The US recently increased 10% tariffs on $200 billion of Chinese goods to 25%. They also threatened that it could also tariff the remaining $300 billion of Chinese goods entering the US annually. Alongside this, Trump also recently announced that he plans to raise tariffs on EU and Japanese autos imports to the US. He is currently in trade negotiations with both the EU and Japan.

Trump Raises Tariffs on All Mexcian Goods

On top of the EU, Japanese & Chinese tariffs, just last week, Trump dropped a bomb on financial markets. He announced his plan to tariff all Mexican goods crossing the US border. This will come if the Mexican government doesn’t act to restrict the flow of migrants entering the US. Despite protest, Trump said that he will press ahead with a 5% tariff on all Mexican goods until June 10thThis could then be increased to 25% if the situation isn’t dealt with.

Trump’s threat to Mexico was met with widespread disgust, even by members of his own party. They noted how wrong it was to use trade tariffs as a threat in a bid to deal with illegal immigration. Furthermore, such a move has provoked fears of mass disruption for US consumers and companies. This is especially for those in the autos and agricultural sectors.

Trump Strips India Of Tariff Exemptions

Finally, Trump also announced late on Friday that he was removing India’s special status as of today, June 5th. This sees it exempt from billions of dollar’s worth of products which could be tariffed going forward. Trump said this was in response to India having failed to give the US “equitable and reasonable access to its markets”.

Technical Perspective

SPX500

The current move in the SPX500 is particularly interesting. Having broken down through the neckline of the smaller head and shoulders pattern to test support at the 2744.13 level, price has since recovered strongly and is now retesting the 2816.15 level from below.

This level too could prove to be the right shoulder of a broader head and shoulders pattern. This is again putting the focus back on a move lower, with the 2744.13 level the neckline. A break above the current resistance would negate the pattern, however, putting focus on a rest of the 2856.30 next.

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