The trade talks are happening right in front of investors’ eyes this week, and that’s one reason for all the volatility
You sometimes hear that sausage-making is a messy process that shouldn’t be watched too closely. The same might be true when it comes to trade negotiations with China. We’re basically watching it unfold right in front of our eyes, and that makes for some choppy, volatile trading.
If there’s anything positive to consider, it’s arguably that the Cboe Volatility Index fell below 20 again late Wednesday after zooming from below 13 to above 20 over the last four sessions. The heightened trade talk risk played right into the VIX rally, but there’s a sense that anything below 20 in the VIX could signal optimism. Any news, positive or negative, out of the talks could potentially swing VIX back higher or lower, along with the stock and Treasury markets.
Some economists said an all-out trade war with China could also take a slice out of U.S. gross domestic product growth after a surprisingly strong 3.2% reading in Q1. The Atlanta Fed’s GDPNow tool is already predicting an anemic 1.7% GDP growth for Q2, but tariffs imposed now probably wouldn’t have an immediate GDP impact.Earnings season continues, though it’s a bit slower this week before picking up again next week .
Looking at the technical picture, it might be a positive sign that for the second-straight session, the S&P 500 Index managed to close Wednesday above its 50-day moving average, which is just below 2860. A slide under that today might have the chance to generate additional selling. On the other hand, the S&P unsuccessfully tested 2900 on Wednesday, and that psychological number could represent technical resistance in the days ahead.
Figure 1: CAUTION FLAG: The Treasury market is getting some bids this week amid cautious sentiment around trade talks. This one-month chart shows the 10-year Treasury yield , which moves opposite of prices, falling below 2.5% in recent days. Meanwhile, gold , another product that sometimes sees interest in rough times, has started to move up a little. Data Sources: Cboe, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only.
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