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Market Lab Report - Premarket Pulse 3/26/18

Major averages plummeted on heavy volume as the markets continue to fear the repercussions of a full blown trade war between the U.S. and China. Trade wars are bearish events since they stifle growth. This comes at a time when QE has yet to jump start the global economy in a way that is meaningful enough that central banks can start reducing QE by material amounts. The S&P 500 closed at its 50-day moving average. 2018 has brought the first steep correction since early 2016. While the aggregate amount of global QE remains at or near record levels, the headwind of a trade war together with a global economy that QE is having a tough time resuscitating could result in the first correction exceeding -20% since 2011 when the S&P 500 corrected -21.6% and the NASDAQ Composite corrected -20.1%.

That said, futures are gapping higher today on reports that U.S. and China officials are conducting behind-the-scenes talks to avert a global trade war. Both countries realize that such a war could quickly become a stalemate. Still, the uncertainty of a quick and satisfactory resolution will keep markets on edge.

Over in central bank land, Fed Fund rates stand at 1.75%. Can the Fed really hike another 3 or 4 times? Once rates rise beyond 2%, a stronger dollar would dampen emerging market growth. This could force the hand of various global central banks to prematurely hike rates when they have no room to do so. In addition, a stubborn 2% rate of inflation due to lack of demand despite interest rates still at or near all-time lows puts a cap on how high rates can go. So while the Fed would love to normalize rates back up toward historical norms, the market in its current state will not allow for it.
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