Last Friday, it looked unlikely that America and Canada would reach the September 30th deadline to make a trade deal. But it happened on Sunday night.

The action on Monday makes perfect sense as the Dow increased 0.73% and the Russell 2000 fell 1.39%.

America and Canada came close to their previous deadline. These negotiations were never as contentious as they still are between America and China. The S&P 500 was up 0.38% and the Nasdaq fell 0.11%. They all lost some of the initial pop on the news early in the trading session.

This is big news regardless of the stock market’s reaction because Canada is America’s 2nd largest trading partner. It appears the S&P 500 didn’t rally that much because investors anticipated this getting done.

The new deal includes Mexico, Canada, and America. It is called USMCA. It replaces NAFTA which was in place for 24 years. In the deal with Canada, Canadian leaders will be granting American dairy farmers more access to its markets.

Canada will also cap vehicle exports to America. Personally, I don’t think this deal will have a major impact on America’s deficit with Canada. I also don’t think the deficit is a problem.

America had a $21 billion trade deficit with Canada in 2016, meaning it’s nowhere near the size of the deficit with China.

Since this deal exists in the age of the internet, it modernized business by adding provisions on digital trade and intellectual property. The deal is going to be reviewed every 6 years.

Canada also gave up the right to negotiate a free trade deal with China. Another reason the stock market may not have rallied is the steel and aluminum tariffs are still in effect with Canada and Mexico.

Now that this deal is done, it gives America momentum to come to an agreement with China. America has the upper hand but is asking for more intellectual property reforms. This makes a deal more difficult to achieve.

Trade Deal - Quotes From Manufacturing ISM Report

In the ISM manufacturing report, there were a few quotes on the tariffs. A miscellaneous manufacturing firm said, “Suppliers are impacted by China tariffs, [which is] delaying or canceling manufacturing transfer projects.”

China is being hurt more by the trade war, but a few American firms are feeling the heat.

The best quote was from a computer and electronics products firm.

Management said, “The market is in a state of chaos with the latest round of tariffs. As an electronics original equipment manufacturer, our component prices have been impacted almost across the board. The tariffs have caused a mass rush to buy up inventories of affected products in order to minimize the long-term financial impact. This, in turn, is causing market constraints, which further drive up the cost and increase lead times”.

This exemplifies the point I made about soybean exports. There was a mass scramble to buy products ahead of the tariffs which caused inventories to fall sharply.

The spike in demand wasn’t expected. It’s also fair for firms to not rebuild inventory quickly because after the tariffs are in place, demand should fall. We’ll get the details of how this played out when the Q3 GDP report comes out.

It’s worth noting that because the American consumer drives the economy, the imports index in the ISM manufacturing report is correlated to GDP growth.

As you can see from the chart below, there was a spike in the imports index earlier in the year. It is now in a minor downswing. The imports index was up 0.6 to 54.5 in the September report.

Trade Deal - Markets Update

The trade bellwether, Caterpillar, was down 0.14% and the other bellwether, Boeing, was up 2.79%.

The best performer in the S&P 500 was GE as it increased by 7.1%. It named a new CEO after the previous one was only in charge for 14 months.

Changing leaders on a sinking ship may not save the firm; it looks like a desperate move. The worst sectors were real estate and utilities as they fell 0.85% and 0.3%.

Best sectors were energy and materials which increased 1.47% and 1.04%. WTI oil increased 0.2% to $75.45. In the past few days, the dollar has rallied which makes it even more impressive that oil is this high.

The 10-year yield increased 2 basis points to 3.08% and the 2-year yield was flat at 2.82%, meaning the curve steepened. The two yields have a difference of 26 basis points.

I’m not a technical analyst, but I still would like to see the 10-year yield’s increase confirmed by it getting above the 3.11% high in May. It has failed to do so for the past couple weeks.

The Fed remains in great shape as there is a normal curve and the chance of it raising rates at least 1 more time in 2018 is 81.2%. The trade deal with Canada decreases the potential inflation a trade war will bring.

Trade Deal - Tesla Stock Soars 17.35%

Tesla stock increased over 17% on Monday because the situation between Musk and the SEC was settled. Elon Musk and Tesla were each fined $20 million.

Elon Musk needs to give up his chairman role for 3 years and the firm needs to appoint 2 independent directors to the board. This situation turned out fantastically.

Shareholders don’t care about the fine to Elon. Essentially, they paid $20 million to get a more balanced board. This situation could also end up keeping Musk in line. He needs to focus more on production and less on Twitter.

The stock also increased because the company made about 80,000 cars in Q3. This is almost as much as it produced in the prior 2 quarters combined.

It made 53,000 Model 3 cars which is in between its guidance of 50,000 to 55,000. The company will be reporting results next Monday. Investors will be focused on whether Elon can also deliver on his promise to get Tesla to profitability.

That would make investors forget about this SEC controversy.