Land of the Rising Trade Deals
Trump calls pact with Japan 'largest in history,' as other Asian nations sign deals including one that could boost Boeing; Also, let's check three Sarge favs: Palantir, Rocket Lab, Sofi.
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On Tuesday evening Pres. Trump posted to his account at Truth Social, "We just completed a massive Deal with Japan, perhaps the largest Deal ever made. Japan will invest, at my direction, $550 Billion Dollars into the United States, which will receive 90% of the Profits. This Deal will create Hundreds of Thousands of Jobs." The president then added, "Japan will open their Country to Trade including Cars and Trucks, Rice and certain other Agricultural Products, and other things. Japan will pay Reciprocal Tariffs to the United States of 15%."
The 15% tariff on Japanese goods exported to the U.S. is down from the 25% tariff threatened in a letter earlier sent to Japan by the president. Details on how Japan would invest $550 billion or how the U.S. would receive 90% of the profit from those investments are not yet public. The president then met Republican legislators at the White House where he referred to this deal as the "largest trade deal in history" and mentioned that the Japanese government would enter into a "joint venture" with the U.S. for natural gas exploration in Alaska.
Japan's lead negotiator Ryosei Akazawa posted, "mission accomplished" to his X (formerly Twitter) account. Japanese Prime Minister Shigeru Ishiba spoke to reporters in Tokyo and said that this deal "Will lead to Japan and the U.S. working together to create jobs, produce high-quality goods and contribute to fulfilling various roles in the world going forward." The 15% tariff will include automobiles manufactured in Japan for U.S. export, also down from 25%. The Nikkei 225 rallied 3.5% in response. U.S. equity index futures are trading higher overnight, but the rally is more tempered as the U.S. still has some pretty big fish to fry.
Avalanche of Trade News
Up until Tuesday, the U.S. had only put the final touches on a few trade deals since the Trump administration had held its "Liberation Day" and then implemented and extended what was originally a 90-day pause in what the president calls "reciprocal tariffs." The U.S. and the U.K. quickly came to an agreement. Then the U.S. and Vietnam came to terms. The U.S. and China had agreed to a trade truce and a "framework" that works for now. That framework has lowered tariffs, while allowing the sale of U.S. technology products to China in exchange for Chinese magnets and rare earth minerals.
Then came Tuesday. During the regular trading session, the president announced a revised trade deal with Indonesia that had first been mentioned last week and a trade deal with the Philippines. Under the terms of that deal, Indonesia will purchase $3.2 billion worth of aircraft from Boeing BA, $4.5 billion worth of soybeans, wheat, cotton, and other crops, and $15 billion worth of oil and natural gas from the U.S.
The U.S. will impose a 19% tariff on Indonesian imports, down from the 32% mentioned in a letter that President Trump had sent that nation. There will be no tariffs on U.S. goods exported to Indonesia. As part of the deal, Indonesia will provide critical metals and minerals to the U.S. Indonesia is one of the planet's largest producers of nickel, while also being a key exporter of such rare earth minerals as monazite and xenotime.
The deal with Indonesia is a more impactful deal than I think many realize. Imports from the Philippines will also face a 19% tariff, down just one percentage point from the 20% that Pres. Trump had threatened in his letter last week.
Still Ahead
The most dangerous negotiatory risk on trade for the U.S. and American financial markets is probably still what happens between the U.S. and the European Union. As an aggregate, the E.U. would be the largest U.S. trading partner and there is skepticism that a trade deal between the two will come off well. Some see the U.S. as likely to go through with threatened 20% tariffs on imports from the region on the already extended Aug. 1 deadline.
This would most likely draw some retaliation from the block as the E.U. is known to have prepared to place increased duties on about $100 billion worth of U.S. exports. This would include liquor, steel, aluminum, tobacco and other agricultural products. Should this be the way the cookie crumbles, Pres. Trump could then increase tariffs on E.U. imports further by hitting the auto industry.
There's More...
Treasury Sec. Scott Bessent appeared at Fox News on Tuesday. Bessent said, "I'm going to be in Stockholm on Monday and Tuesday with my Chinese counterparts and we'll be working out what is likely an extension then." Remember, the framework deal with China expires on Aug. 12, not Aug. 1, so there is some wiggle room at least for a couple of weeks.
That also means that there is some room for some headline risk for investors. Remember, back when humans controlled the point of sale, fantastical headlines were largely ignored if they did not sound realistic. Now that robots and algorithms run the show, every stupid keyword forces intentional momentum overshoot as inefficiencies are now part of market structure design.
Bessent also mentioned that "Trade is in a very good place with China. We're going to be talking about a lot of other things that our countries can do together." Among those other topics that will be brought into the conversation will likely be China's continued purchases of sanctioned oil from both Russia and Iran.
El-Erian Tweets
On Tuesday, Mohamed El-Erian (president at Queens' College, Cambridge University and chief economic advisor at Allianz) posted to his "X" account: "This morning, US government criticism of both Federal Reserve Chair Powell and the institution itself has broadened to include 'mission creep' and the effectiveness of other officials. The developments of the last few days reinforce my view: If Chair Powell's objective is to safeguard the Fed's operational autonomy (which I deem vital), then he should resign."
El-Erian added, "I recognize this isn't the consensus view, which favors him staying until the end of his tenure in May. Nor is it a first best, which is simply not attainable. Yet, it's better than what is playing out now – growing and broadening threats to Fed independence – and will undoubtedly increase should he remain in office." Finally, El-Erian finished his tweet: "As to market reaction, most of the frequently mentioned candidates to replace Chair Powell would be able to calm any potential market jitters."
Do I agree with El-Erian? I agree that Powell's time at the Fed is ending. I do disagree with Powell on how he has implemented monetary policy. I think he has permitted his personal issues with the president to cloud his judgement and that has probably negatively impacted hundreds of millions of people. That said, unless there is something illegal uncovered in how the funds spent on the refurbishment of the Fed's buildings in Washington were allocated, I would prefer he finish his term.
As for El-Erian, I have never been impressed with him as an economist. In my opinion, he always seems to be expressing ideas that we almost always already read somewhere else or at least have already been discussing among ourselves for quite a while. Maybe I'm the jerk, but I kind of put him in the same class as New York Fed Pres John Williams. In other words, there is no need to un-mute the TV when you see these guys show up on the tube.
Marketplace
Equity markets traded rather well on Tuesday, despite some continued skittishness across higher beta names, the Mag 7 and the semiconductors. Professional money rotated out of those groups and into the small and mid-cap stocks as well as the transports. The S&P 500 gained just 0.06% and the Nasdaq Composite gave up 0.39%, pressured by the Philly Semiconductors. That index surrendered 1.75% for the day.
Where did this flow of capital lead? The Dow Transports gained 1.75%, followed by the S&P Midcap 400, the S&P Smallcap 600 and the Russell 2000. Those three indexes were up 1.3%, 1.04% and 0.79% respectively. Treasury yields compressed further, but have largely returned to slightly higher levels overnight.
Ten of the 11 S&P sector SPDRs closed out the Monday session in the green with five of those funds gaining at least 1% for the regular session. Before we celebrate though, all four defensive sectors finished the day in the top six on the performance tables led by Health Care XLV and the REITs XLRE. The two growth sectors placed in tenth and 11th pace on Tuesday with Technology XLK in the red. Among those semis that took the brunt of the sell-off, KLA Corp KLAC gave back 4.86% followed by Lam Research LRCX and Micro Technology MU.
Breadth
Breadth was decisively positive. Winners beat losers by a rough 5 to 2 at the New York Stock Exchange and by about 5 to 3 at the Nasdaq. Advancing volume took a 74.9% share of composite NYSE-listed trade and a 66.4% share of composite Nasdaq-listed activity. Sounds good? A reconfirmation of our upward trend?
Not exactly. Remember, the S&P 500 barely got itself across the finish line and both the Nasdaq Composite and Nasdaq 100 posted red candlesticks. While aggregate trading volume across NYSE-listings was indeed up 13% on a day-over-day basis, aggregate trade was down 12.2% across the universe of Nasdaq-listed securities.
Trading Notes
- Palantir Technologies PLTR passed a key test of its 21-day exponential moving average on Tuesday and remains above the central trendline of our Raff Regression model. The set-up remains bullish
- Rocket Lab RKLB has not even as yet tested the upper trendline of our Andrews' Pitchfork model and has still come nowhere close to retesting any of its key moving averages. The set-up remains bullish.
- SoFi Technologies SOFI passed a key test of the central trendline of our Andrews' Pitchfork model on Tuesday. That said, the daily Moving Average Convergence Divergence stopped sending bullish signals on Tuesday. The indicator is not bearish, but at the moment, it is no longer bullish after having been bullish since early June.
Economics
(All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.382.
07:00 - MBA Mortgage Applications (Weekly): Last -10% w/w.
10:00 - Existing Home Sales (Jun): Expecting 4M, Last 4.03M SAAR.
10:30 - Oil Inventories (Weekly): Last -3.859M.
10:30 - Gasoline Stocks (Weekly): Last +3.399M.
1:00 p.m. - Twenty-Year Bond Auction: $13B.
The Fed
(All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights
(Consensus EPS Expectations)
Before the Open: T (.53), FCX (.45), GD (3.54), HAS (.77)
After the Close: GOOGL (2.19), CMG (.33), CSX (.41), IBM (2.66), NOW (3.57), TSLA (.41), URI (10.57).
At the time of publication, Guilfoyle was long LRCX, PLTR, RKLB, SOFI equity.
