The UK makes a U-turn on Huawei.

The UK made an about-turn decision in banning Huawei technology in its 5G networks. They were double-minded all along and even told US they were totally cool with all the shady spy stuff in Huawei’s technology. Britain said they were a very strong, independent and intelligent country who could handle these sorts of risks.

So, how come they changed their mind so fast? Think China’s decision to violate an international treaty to take control of HK hurt UK’s feelings very much. UK is still very emotionally attached to HK though they had to surrender HK to Chinese Sovereignty after 156 years of rule. So, when China disrespected some of the preconditions, it became too sensitive for UK.

While this is a big win for the US in winning other allies to fall in line, it comes at a big cost for UK. According to Oliver Dowden, the minister in charge of digital affairs said, “new purchases of Huawei equipments will be barred starting end of this year and by 2027 all Huawei items will have to be stripped out of UK’s internet networks”. Dowden added further that this decision will delay the rollout of 5G in the UK by as many as three years and cost up to GBP 2 billion. We think it’d much more.

US security officials have all along maintained that Huawei could use its 5G networks to spy on foreign citizens and officials for the Chinese government. Huawei’s has publicly stated that they’d never do such evil things. Representatives from US, Italy, France, Germany, and the UK are meeting in Paris this week to discuss this whole spying issue. The outcome of that meeting should make things much clearer for the future of Huawei in international markets and which companies will emerge as a better competitor to Huawei.

In other news, Apple won a landmark tax battle in Europe saving the company almost $15 billion in Irish back taxes. The European Commission has been pursuing this case for the last five years in forcing big tech companies headquartered in Europe to pay the same taxes as traditional businesses. They have just lost it.

The eminent economist David Rosenberg made the observation that the equal weight S&P 500 is at the same level today as on Jan 03, 2018, NYSE composite is at the same level as Sep 15, 2017 and the Russell 2000 is where it was on Jul 14 2017.

The forward return probabilities remain low. But the Fed has our back and they have restated that “they will do whatever it takes.” They are now riding a tiger that they can’t get off. The two presidential candidates for the Nov elections are also in a spitting competition as to who can outdo the other when it comes to additional stimulus.

Equities

We may think that the stock markets in general has done a lot, but it is not true. We mentioned in our previous reports about an island reversal that occurred in early June. The Dow came close to the highs of June 08 and the S&P even exceeded the levels on an intraday basis on Jul 13,15, and 17 but not on a closing basis. All the excitement has been created by the NASDAQ and that too seven stocks. Amazon, Apple, Facebook, Alphabet (Google), Microsoft, Netflix, and Tesla. We can argue almost a monopoly situation for all the above stocks, but we will cover that at a later stage.

While the general markets have gone nowhere most of the sentiment indexes have gone in the wrong direction. In the last seven weeks the daily sentiment index (DSI) in the S&P 500 has moved up from 74 to 91. The percentage of bullish reports in surveys has increased from 53.5 to 58.5 the highest extreme since Jan (59.5). The CBOE equity put/call ratio has declined from.513 to.437 indicating the biggest call buying to put buying in the last 20 Years.

The NASDAQ is already showing signs of exhaustion since it made its recent high of 10,825 on Jul 13. A close below 10,365 in NASDAQ should change the game to the downside for all markets.

Bonds

The bond markets are in such a complex consolidation that it is not worth discussing. The risks are more aligned to challenging its high of Apr 21, but our view is still for the markets to break down.

Euro

While everything was looking good for Euro to break down it has moved up again which means there is a risk that it will move above its recent high at 1.1453. A move up to 1.1500 and change should not be surprising. What we believe is that the long euro is a crowded trade.

Gold

Gold made a significant break up on Jul 08 but it has not followed through. The prices since has been sideways to overlapping. The market sentiment is extremely bullish on gold.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.