The Trade Fade

The trade fade.  Stocks were all over the map on Friday, opening lower on trade fears, climbing into the black on positive trade comments, and ultimately closing in the red because trade problems are still not resolved.  It was a down-up-down day for stocks in which high consumer confidence along with positive progress on trade with Canada and Mexico were not enough to quell investor fears.

WHAT YOU NEED TO KNOW:

1)  Trade issues are far from being solved.  China has significantly turned up the rhetoric in state media.  The key word in that is “state”, which in China means: The Chinese Government.  The jabs were a key factor in Friday’s drop in stocks.  The stabs continued in the Chinese media over the weekend.  Also, over the weekend WHILE YOU SLEPT, Japanese Automaker Toyota expressed frustration with the Trump Administration’s trade policies which are causing financial stress on their US investments.  Toyota is threatening to significantly pull back investments in the US… nothing to ignore considering that Toyota has been “deeply ingrained” in the US for 60 years.  Meanwhile Canada and Mexico got some relief on Friday as the Administration announced that it will remove aluminum and steal tariffs imposed on imports to the US.  Canada and Mexico responded by removing their countermeasure tariffs clearing the way for the USMCA, which still needs congressional approval.

2)  BREXIT, yeah you read that correctly… is still a thing, really.  Just because it hasn’t hit the US tape recently doesn’t mean that the British Parliament is on vacation.  They have been hunkering down on their positions and PM Theresa May has managed, somehow, to remain in her post despite a significant loss of confidence from her own party.  Over the weekend, WHILE YOU SLEPT (or watched horses and cars race, baseball games, or dragons breathe fire), May announced that she is preparing to bring a significant offer to the House of Commons in order to move the process forward. Meanwhile, the Labour party continues to lean toward a second referendum vote to get approval for its version of BREXIT.  What does it all mean?  As tensions re-heat up and with EU Parliamentary elections coming up in the later part of the week, we can expect volatility in European markets.

3)  Consumers are confident… and that is really good news.  On Friday, the University of Michigan Sentiment Indicator came in with a beat at 102.4 versus last month’s 97.2.  That is the highest level in 15 years and it was helped by a jump in future expectations.  The index recently dragged a bit due to the government shutdown as well as trade tensions but future fears appear to be behind us (if that makes sense).  The index factors in sentiment about current conditions along with future expectations, and feelings about the future appear to be on the rise.  It is important to keep in mind that the survey took place before this latest spike in trade tensions with China.

THE MARKETS:

Stocks started Friday’s session in red on trade tensions and a weak earnings release by Deere & Co. (its fifth miss in a row) only to be uplifted by the Administration’s announcement that the US would be removing aluminum and steel tariffs on Canadian and Mexican imports.  Stocks ultimately faded into the close as investors reversed back into negative sentiment on trade.  The S&P500 closed down by -0.58%, the Dow Jones Industrial Average traded down by -0.38%, the Russell 2000 fell by -1.38%, and the NASDAQ 100 slipped by -1.01%.  Steel and aluminum prices fell on the tariff announcement and that will be welcome news for manufacturers of steel and aluminum products.  Luckin Coffee, a competitor to Starbucks in China, offered its ADR’s in an IPO on Friday and shares trades up by +19.88% in its first day of trade.  Bond traders continue to position for a downturn in the economy with chances of an interest rate cut increasing.  Bonds traded up on Friday and 10 year yields remained unchanged at 2.39%.  According to futures markets, there are even odds for a rate cut by September and a 75% chance of a rate cut by December.

WHAT TO LOOK FOR TODAY:

We have no major economics releases today but we will hear from a number of Fed speakers.  Early in the day, the Philadelphia Fed President will speak followed by New York Fed President and Vice Chairman Richard Clarida, who will speak in NY midday.  Later in the session we will hear from Chairman Jerome Powell who will be speaking in Atlanta.  The Fed has a lot to say in recent weeks and traders will be listening carefully.  Also today, Twitter will present its annual shareholders’ meeting online and UBS will host a healthcare conference which will feature a number of large players in the industry.

WHAT TO LOOK FOR IN THE WEEK AHEAD:

The economic calendar this week will feature some more numbers on the housing market, Manufacturing / Services PMI, and Durable Goods Orders.  Manufacturing PMI and Durables are viewed as leading economic indicators and will be looked at closely because the PMI’s have been slowing a bit lately, making some economists uneasy.  On Wednesday, the Federal Reserve will release minutes from its last FOMC meeting and investors will want to get more detail around the internal debate regarding slowing inflation and what to do about it.  We will also hear from many Fed speakers this week which will also give traders more data points on the Fed’s next move.  Finally we will have an earnings release week dominated by retailers starting with Home Depot, Kohl’s, TJX, and JC Penney before Tuesday’s bell.  Please refer to the attached weekly economic and earnings calendar for details.

daily chartbook 2019-05-19

earnings releases 5_20

econ numbers 5_20