Trump Launches Trade Wars as the Market Deals With Speculative Excess
Thanksgiving holiday is typically very good for speculative trading. But this theme has already had a very powerful run.
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President-elect Donald Trump surprised the market on Monday night when he released the first salvo in trade wars with Mexico, Canada, and China weeks before he even takes office. It is classic Trump negotiating tactics and likely just the first step in what will be protracted and difficult negotiations.
Trump is proposing a 25% tariff on imports of all goods from Mexico and Canada on the basis that both countries are facilitating illegal immigration and the importation of fentanyl. Both the Mexican peso and Canadian dollar weakened on the news, and automotive stocks such as General Motors GM and Ford F are down since they rely extensively on imported parts.
Trump also proposed an additional 10% tariff on Chinese imports on the basis that China is doing nothing to regulate the chemicals that are used for the production of fentanyl. This is likely a warning to China that Trump will quickly follow through with his trade threats once he takes office.
The market reaction to this news is mixed. Technically, stocks are extended, and it provides a convenient excuse for some profit-taking. Most notably, there is rotational action back into the Magnificent Seven MAGS and out of the Russell 2000 IWM small-cap index. Bonds are slightly weaker, but the dollar is steady.
Bitcoin IBIT is pulling back more than 2.5% and looking for some support. Bitcoin has been the hottest sector in the market, so corrective action isn’t a big surprise. I expect to see aggressive dip buyers eventually, but the timing will be difficult.
The period around the Thanksgiving holiday is typically very good for speculative trading of smaller stocks, but the problem is that this theme has already had a very powerful run that was driven by the election results. Many of these small stocks are very extended and do not offer great entry points. That doesn’t mean that they can’t become more extended, but it will be very difficult for prudent traders to chase entries other than for very short time frames.
The indexes have minor gains early on Tuesday, but the news flow is going to cause elevated rotational action and increased volatility. If your time frames aren’t very short, it will be difficult to make many moves.
At the time of publication, Rev Shark was long IBIT.
