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Markets Down, Tensions Up Ahead Of Trade Talks

Stocks closed lower yesterday on trade concerns ahead Thursday's face to face talks with China.

The markets were also weighed upon by reports that the U.S. was looking into tighter scrutiny on Chinese companies, many of which remain unaudited by U.S. regulators. This was reported on the other week, but was dismissed as being in the very early stages of discussion. But comments by Larry Kudlow yesterday morning, the top economic advisor for the White House, put it back into the spotlight.

Mr. Kudlow said that delisting of Chinese companies was "not on the table," even remarking that he "didn't know where that came from." But he did confirm they were looking at "investor protections" in regard to Chinese companies trading on U.S. exchanges. They've opened up a study group to look at it, but again, stressed that they were "very early in our deliberations" on this.

Other reports interpreted these developments to mean that the U.S. was looking into possibly restricting government pension fund investments in China.

Whether this is a negotiating tactic ahead of Thursday's U.S.-China trade talks to illustrate the additional leverage the U.S. could wield against China is unknown.

But the key takeaway, whatever the reasons behind it, is that it's still in the early stages of consideration, so nobody should get overly worked up about it.

The WH wasn't done increasing the pressure on China as they also announced they would be expanding their trade blacklist to include eight Chinese tech firms.

Again, is this a bargaining chip ahead of trade talks? More carrots and sticks (heavy on the sticks)? We'll have to wait and see. But in two days we'll begin to know more.

In other news, Fed Chairman Jerome Powell, said they will soon start growing the Fed's balance sheet again after the numerous times they were forced to inject liquidity into the overnight lending markets over the past few weeks. He was quick to point out that this should not be confused with the aggressive Quantitative Easing (QE) that they did in the past after the 2008 crisis, but instead would be more like actions they took prior to the crisis regarding these matters.

Mr. Powell didn't go into detail on what measures they would take, but said they would be revealing them soon.

Either way, that would be a bullish event for the market, or neutral at worst. But definitely not bearish.

But the trade talks with China is the main event this week. And traders will likely be hanging on every news article, statement, or report having to do with it.

So I would expect a volatile rest of the week. But if any kind of good news comes out of the talks, stocks could soar.

Exciting times.

See you tomorrow,

Kevin Matras

Executive Vice President, Zacks Investment Research


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