The Market Waits for Buenos Aires

 

Stocks have rallied since Thanksgiving, making normally ungrateful traders count their blessings.

They’re most thankful for Federal Reserve Chairman Jay Powell, who brought Santa Claus early to Wall Street Wednesday with a highly anticipated appearance before the Economic Club of New York.

The previous month, Powell had said the current federal funds rate (now between 1.75% and 2%) was “a long way” from neutral, meaning investors should count on several rate hikes ahead. Wall Street freaked out and stocks tanked, also buffeted by fears over the midterm elections and continued trade battles with China.

But when on Wednesday Powell walked back that remark (or, by some interpretations, “cleaned up” his previous language) and said fed funds was “just below” the neutral level, stocks soared. The Dow Jones Industrial Average jumped more than 600 points Wednesday and is up almost 1,250 points since last Friday’s close, while the S&P has risen nearly 5% and the Nasdaq has done even better.

But whether this lasts and becomes a true Santa Claus rally depends on what happens in Buenos Aires, Argentina this weekend.

That’s where President Trump is set to meet with Chinese President Xi Jinping at the G20 summit. There’s been lots of speculation the two presidents will strike a modest deal to halt festering trade tensions between the world’s two largest economies.

The big issues reportedly are technology transfers, structures of U.S.-Chinese joint ventures and intellectual property protection. They may sound technical, but they go to the heart of the president’s claims (which have merit, by the way) that China has disproportionately benefited from its trade with the U.S.

It’s hard to imagine that China would have come so far, so fast without the money and opportunities its firms got from the massive U.S. consumer economy. U.S., European, and Japanese consumers have lifted hundreds of millions of Chinese out of poverty into the middle class—at the expense of millions of their own citizens.

David Autor of MIT, one of the preeminent experts on the U.S. labor market, estimates that the trade imbalance with China may have cost two to three million American jobs. The social and political consequences of that are incalculable.

So, now a weakened President Trump, reeling from midterm election losses and the admission by his former attorney Michael Cohen that the Trump Organization was negotiating to build a massive project in Moscow all the way through June 2016, will face President for Life Xi across the negotiating table.

A modest agreement even to talk more would probably be enough for Santa Claus to come to town. But if talks collapse and President Trump doubles down on tariffs, well, it will be Grinch time on Wall Street.

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