But the one certainty in our view is that U.S.-China tensions are on an inexorable rise, and higher volatility is likely.

Our Top Market Takeaways for the week ending October 11, 2019.

A whirlwind of a week

At the start of the week, it looked pretty bleak: The S&P 500 was off -2.0% by Tuesday as the United States ramped up pressure on China. But as trade talks on Thursday drew closer, and leading officials signaled optimism for some sort of progress, stocks turned around. By Thursday’s close, the S&P 500 had recovered most of its losses, down a modest -0.5% for the week. Meanwhile, the Europe Stoxx 600 was buoyed +0.6% and the British pound rose the most since March on news that a break in the Brexit stalemate might (finally) be on the horizon. China’s onshore CSI 300 (+2.6%) and Japan’s TOPIX (+0.5%) both finished the week in the green. Under the sector hood, all the late-week good feels pushed more cyclical sectors like Energy, Financials and Materials higher.

First things first: Let’s take stock of the latest drama on trade. Heading into high-level discussions on Thursday, the outlook seemed gloomy. To kick off the week, the United States blacklisted another 28 Chinese entities, announced it’s considering restricting portfolio flows into Chinese stocks, and slapped visa bans on Chinese officials. The moves were reportedly in response to alleged human rights violations, particularly the detention and treatment of Muslim Uighurs in the Xinjiang province, but it’s hard to disentangle it all from trade talks. While China wasn’t too happy, and forewarned that U.S. officials should “stay tuned” for retaliation, it later came out and said it was still willing to accept a limited trade deal this week. Now, talks are underway and are set to run through today. What a whirlwind. We break down our thoughts on these moves below.

Trade wasn’t the only major news, though. The Fed was also back on the docket. At an economics conference this week, Chairman Powell signaled that another rate cut is on the table this month and said that the FOMC would begin expanding its balance sheet. But, and this is important, it’s not Quantitative Easing, guys. It’s all an effort to help out with the liquidity woes overnight interest rate markets have been feeling. Aside from that, we also got a look at the meeting minutes from the Fed’s get-together last month. While FOMC members voted to cut rates in September, a few felt that the Fed had already been accommodative enough. But with sluggish inflation and a handful of disappointing data between the last decision and now, we think the Fed’s easing bias is still intact.

If October already feels pretty volatile, we’d note that’s not out of the ordinary. Going back to 1980, October has historically been pretty volatile compared to other months. In fact, the range in prices during October tends to be higher than any other month—at about 8.3%. Of course, there’s always the chance that any month bucks the trend, but a volatile month doesn’t necessitate poor returns—for a given month, or year for that matter.

Graphic showing the average intra-month, high-low price range for 1980 through 2018. The average across all months is 5.9%, whereas the October average is the highest at 8.3%.

Our thoughts on the trade tango

Following the first day of high-level trade talks between the United States and China, optimism is rising around a trade truce (or “mini-deal” as it’s referred to). After a very volatile news flow, the announcement that talks will continue into Friday is the first piece of good news following a spate of escalatory moves. Details still remain murky, but there are reports that China will purchase more U.S. agricultural products and agree to a “currency pact.” In response, the United States will halt upcoming tariff increases and lift some sanctions, including those on COSCO, China’s biggest shipping company.

If all of this sounds familiar, it’s because it is. All of what was reportedly agreed to yesterday is simply repackaged agreements from the last successful round of talks in April. So it’s positive in terms of the mood music, but still very far from any actual game-changing deal. This fits in line with how we’ve broadly viewed negotiations: We think a truce or stalemate is the most likely near- to medium-term outcome. To reiterate, we think there is a ceiling on U.S. tariff escalation that will prevent the next tariff rounds from going into effect, but a floor in terms of what the United States is willing to accept and China is willing to offer. This likely will result in current tariffs remaining for now. You can read more here.

As always, the next round of talks is crucial both for determining how much more China is willing to offer and for evaluating the follow-through. In particular, we are interested in the “currency pact.” Many Chinese officials (and those involved in the trade talks) have exhaustively studied the U.S.-Japan trade conflict and the Plaza Accord currency agreement, and they view Japan’s decision to allow the yen to appreciate as one of the primary causes behind its subsequent years of stagnation. As a result, they are very wary of engaging in any similar type of currency arrangement. As ever, enforcement and follow-through will be key.

While any truce or “mini-deal” is unambiguously good news, and markets have reacted as such, we caution that a number of truces have fallen apart in the past, and this likely will be no different. As we think about this over the longer term, we still view a comprehensive deal that fully removes tariffs and tariff uncertainty as having a low probability before the election. The path of trade talks, and political drivers behind both Trump and Xi Jinping, have become very, very hard to predict. But the one certainty in our view is that U.S.-China tensions are on an inexorable rise, and higher volatility is likely as the stresses of “decoupling” become more apparent. That said, in an effort to not sound too gloomy—the talks are progressing positively, and given all the other risks around the world, it’s at least a step back from the brink of further escalation.

Feeling bearish?

And, actually no, we don’t mean for stocks. It’s Fat Bear Week! In other words, a week dedicated to celebrating bears’ weight gain before they start their winter snooze. It’s the good kind of fat! Park rangers of Katmai National Park and Preserve scoured four million acres in Southwestern Alaska to find the fattest bears in the land, and over the last week, over 190,000 folks like you and me voted on our favorite of 12 plump grizzlies. And the heavyweight champion title goes to…Holly! Determined to catch some major z’s, Holly stayed focused on eating as much salmon as she could. In the words of the park, “Long live the Queen of Corpulence!”

MADRID, SPAIN - 2018/12/27: A Brown bear seen waiting for food at Madrid zoo. The brown bear (Ursus arctos) is the largest terrestrial carnivore. In wildlife it is distributed across much of northern Eurasia and North America. It remains listed as a least concern species by the IUCN with a total population of approximately 200,000. (Photo by John Milner/SOPA Images/LightRocket via Getty Images)

All market and economic data as of October 2019 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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