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Olduvai III: Catacylsm
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Event Risk

Event Risk

In rare moments markets face major event risk, in even rarer moments the event risk is well advertised in advance and the risk implies massive potential moves in either direction.
Markets are faced with such a moment right now: The outcome of the China negotiations.

Ever since Donald Trump tweeted out new tariff threats last Sunday markets have experienced their most serious rout in 2019 with $VIX exploding higher right in front of the advertised decision day tomorrow.

In process markets have broken their 2019 up trends (see also Shattered) and indices such as $SPX have rejected new all time highs. The decision outcome tomorrow is likely binary, Trump either follows through on the threat or he won’t. If he follows through China may retaliate and the trade talks long serving as a rallying cry for markets under the banner of “trade optimism” may very well escalate into serious tensions that could either delay any trade resolution for months or even cause them to fall apart with potential very significant consequences.

Of course the tariff threat may just be bluster and/or effective depending on your point of view, in which case we may see a massive rally, even to new highs. Even today we see a quick lift in markets off of Trump’s most recent comments that a trade deal is still possible and he has thought of an alternative and has received a “beautiful letter”. It’s literally a ping pong game, but it’s also a technical one.

Without going into the political or strategic or the myriad of possibilities (including a kick the can scenario) but let’s just look at the potential sizes of the bullish and bearish outcomes.

The bullish: Tensions get reduced and/or a trade deal actually comes to fruition or an “alternative” kick the can scenario brings hope again.

Result: Massive relief rally that can actually produce new highs.

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Olduvai IV: Courage
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