Originally published by AxiTrader
"The signal is truth. The noise is what distracts us from the truth."
That's what Nate Silver wrote at the end of the introduction to his book, "The Signal and the Noise - The Art and Science of Prediction".
Trying to distill the signal from the noise is hard enough in normal times let alone in President Trump's trade battle with China, where it has become a distinctly difficult job.
Advisers, like Larry Kudlow, sought to clarify the President's position and intent last week, successfully calming market nerves. Yet less than a day later the President announced a proposal to add an additional $100 billion in tariffs to the $50 billion already announced.
Many traders and pundits still believe the aggressive posturing toward China and the latest threat is just a negotiating tactic by President Trump. Yet his chief trade adviser Peter Navarro said on NBC’s meet the press on Sunday that the tariffs threat is NOT a negotiating tactic.
The next shoe to drop is a speech by Chinese President Xi and his talk at the Asian Davos at the Boao Forum on Hainan. This is the event of the week for traders, investors, and markets. Will Xi crank the handle on rhetoric or will he strike a more conciliatory tone?
Can he see through President Trump's noise - his bluster - to make a deal? Or, fresh from securing his role as President for Life is he locked into a more aggressive course so as not to be seen to fail at his first test?
That's the key for traders and investors this week.
Markets are coiled to react
China's national English language paper - via its Global Times Twitter feed - has a pinned Tweet from April 4 that said, "Beijing will counter every move Washington makes. The scale of this tradewar depends on how far Trump is willing to go. China is not the aggressor here, but it will stand firm".
Equally, over the weekend, the China Daily reported "Gao Feng, the ministry spokesman, said China will not hesitate but will immediately take all vigorous actions possible, facing escalated trade friction with the US"
"The US side has been fairly unreasonable, seriously misjudged the situation and adopted extremely wrong actions to 'lift a stone, hitting its own feet'. The Chinese side is fully prepared and will not hesitate to fight back immediately with all options possible," Gao Feng said.
Whether that is also a negotiating position of the Chinese is something that President Xi's speech this week will likely elucidate.
That's important because even though stocks in the US are under pressure the bellwether S&P 500 is still holding above the February low around 2,532. Last week's low was less than 20 points above the February low.
So while that low remains intact, so too is the current range. A break, and a close below the one-year uptrend would signal a deeper move toward 2,400. But the recent low has to break first.
Likewise, the US Dollar Index, and the euro, are both coiled within a range and ready to break out should a catalyst emerge.
At present, after a period of consolidation in an overall down trend the jury is still out on which side of the 88/91 range the DXY breaks. But a breach in either direction would be significant.
Likewise, euro has been trading a 1.2150/1.2550 range of late as the balance between the geopolitical risks to the US dollar and the US stemming from these trade battles and the Fed's obvious move toward further tightening, not to mention the weakness in EU growth and ECB expectations have conspired to keep the EUR/USD in this range.
In the same way that Nate Silver wrote, "risk greases the wheels of a free market economy; uncertainty grinds them to a halt".
It seems this period of uncertainty in geopolitics, economic growth, and central bank policies right now has ground the trends of the past year to a halt and reinforcing the recent ranges.
Gold, the kiwi and Aussie dollar, both Brent and WTI, among others are all coiled in recent ranges.
The next shoe to drop
Whether President's Xi and Trump can somehow walk this current face-off back from further escalation is difficult to know. On the American side of the ledger President Trump is clearly prosecuting grievances on jobs, and intellectual property that he believes have cost Americans and the US economy dearly.
And he has support in many quarters from those who were either unwilling or felt unable to call China out on these grievances. So he is likely to continue to prosecute his argument along with the operatives of his Administration - Treasury Secretary Munchin, Commerce Secretary Ross, and trade representatives and advisors Navarro and Lighthizer.
Is this a negotiating tactic? Can a deal be done?
The President left that option on the table with both his announcement for the potential extra $100 billion in tariffs and his weekend tweet where he said, "President Xi and I will always be friends no matter what happens with our dispute on trade".
There is room for negotiation it seems.
Likewise, while the Chinese have said they will steadfastly defend their economy and businesses. And many worry that China may pursue a road which reduces Treasury bond purchases of leads to outright selling we'll have a better understanding of where President Xi's intentions lie in the next day or so.
"In complex systems, however, mistakes are not measured in degrees but in whole orders of magnitude." That's also something Nate Silver wrote in his Signal and Noise book.
I hope that both sides understand the risks.
If a deal is done, if tensions de-escalate, it could ignite a powerful rally for US stocks and the US dollar. But until then we wait.
Either way - we are likely to get an important signal through all this noise in significant range breaks sometime soon.
Have a great day's trading.