Pullback Likely for S&P Amid Continuing Trade War

September 04, 2019

HCM-BuyLine Alpha 09042019


The markets are in a very defined trading range between 2840 and 2950. Furthermore, the market is above the HCM BuyLine® and continues to trade in a back and forth pattern. With the S&P back to resistance at the upper end of its August trading range near 2940-2950 and its 50-day moving average, yet another pullback appears likely leaving the S&P bound within this trading range. Initial trading support is at the 15-day moving average (2893), followed by the low end of the August range near 2822. We expect some new chop into Q3 followed by an upside acceleration into Q4.



China just blinked, not once but twice, stating last week that they would not retaliate at this time after tariffs were placed on additional Chinese goods. The U.S. officials have yet to agree on a date for a visit to Washington this month, and the two countries still have not decided on basic terms of re-engagement, but it appears talks are taking place for a September meeting. China, the largest U.S. trading partner last year, has fallen behind both Mexico and Canada in 2019 amid the increasing tariffs and heightened uncertainty about when -- or if -- the trade war will be resolved.

Hong Kong leader Carrie Lam said today that she will withdraw a contentious extradition bill that has sparked months of mass protest. This withdrawal will be seen as a positive move because escalated protests have been a potential disruptor to the global economy. Some people have also feared this could hinder U.S. and China trade talks.

Gross Domestic Product (GDP) growth was revised in Q2. It was down slightly to a 2.0% annualized rate from 2.1% originally, in line with the consensus. This is notably weaker than the 3.1% growth rate in Q1, confirming that economic activity has lost momentum. On a y/y basis, real GDP was up 2.3%, matching our projection for the full year. We recognize a downside risk to our projection from escalating trade tensions and slower global growth.

  • The ISM Manufacturing Index dropped 2.1 points in August, its fifth decline in a row, to 49.1. This is the lowest level since January 2016, and its first reading below 50 since August 2016.
  • The consensus was for a modest 0.2-point pullback to 51.0.
  • While this confirms that manufacturing has slipped into contraction territory, the broader economy is holding up.
  • Our key recessionary level for this indicator is 48.0 in our Recession Watch Report.
  • The ISM estimates that its latest index reading corresponds to 1.8% real GDP growth annually.
  • We estimate a slower 1.4% growth rate, based on data from the current expansion only.

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