Traders Should Limit Equity Exposure Ahead of Auto Tariff Deadline

Traders Should Limit Equity Exposure Ahead of Auto Tariff Deadline


S&P 500 Price Outlook:

  • The risk-reward profile of holding an equity position over the weekend has been skewed amid recent trade war developments
  • Without a definitive decision from the President regarding the Section 232 investigation, holding equity exposure over the weekend offers unnecessary risk
  • Traders remain overwhelmingly short the S&P 500. Find out how to use IG Client Sentiment Data with one of our Live Sentiment Data Walkthroughs

Traders Should Limit Equity Exposure Ahead of the Section 232 Deadline

Traders should look to reduce risk ahead of the weekend as President Trump has yet to definitively state whether or not the administration will enact auto tariffs on the European Union and potentially other countries. After financial news media reported earlier in the week that various administration officials said the tariffs will be delayed for 6 months, the DAX 30 and Dow Jones surged.

S&P 500 Price Chart: 1 – Hour Time Frame (May 2019) (Chart 1)

SPX

That said, there has been no direct commentary from President Trump on the matter. With a history of contradictory comments regarding trade war progress, holding a risk asset like the S&P 500 or Dow Jones over the weekend looks to serve little benefit from a risk-reward perspective.

Further, after a slew of optimistic comments regarding the USMCA agreement contributed to the rally this week, no official statement on lifting metals tariffs or quotas has surfaced since. Consequently, there are two potential flash points for a breakdown in trade negotiations this weekend.

Evidenced by the largest lower gap in a decade for the S&P 500 this past Monday, trade war developments over the weekend are not uncommon. Should President Trump overwrite commentary from his officials on the Section 232 investigation, expect a significant bearish reaction in global equities.

S&P 500 Gap Measure Percent, Daily (Chart 2)

SPX

On the other hand, maintaining exposure offers little upside. In the month of May thus far, the S&P 500 has gapped higher in just 4 of the 12 sessions. The bullish gaps total 1.08%, whereas Monday’s bearish gap singlehandedly erased -1.43% from the Index’s price. Aside from this Monday’s breakdown, the second most bearish gap was the Monday prior – with a decrease of -1.25%.

View A Brief History of Trade Wars for background on economic conflicts like the US-China trade war.

With that in mind, a sufficient hedge or exiting equity positions altogether may prove to be the most prudent trading strategy. Aside from transaction costs, it appears the potential upside is far outweighed by the potential for another trade war breakdown on Sunday, especially with the addition of a key deadline.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: EURGBP Extends Winning Streak as Brexit Uncertainty Weighs

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