Are we good to go?

Are we good to go?  Stock traders asked themselves that question early in yesterday’s session, unable to find an answer, a morning rally fell flat.  Stocks closed higher yesterday but well off their lows as traders tried to decide what was more important: a potential end to trade troubles or lower interest rates.

 

MY TWO CENTS

 

1.  Trade problems are looking like they will be an ever-present affliction.  Just as the President announced that trade discussions have restarted after a meeting with President Xi last weekend, some new challenges are emerging.  WHILE YOU SLEPT, the Administration announced that it had added an additional $4 billion in EU goods to a list of items which are slated to be tariffed.  You read that right… EU as in the European Union.  The Administration published a list of $21 billion in goods under threat earlier this year and the list just got bigger.  Meanwhile on the US-Chinese trade war, it is important to realize that while it is good that both sides are talking, there has been little, if any, resolution on all of the key issues.  While a relaxation on some of the restrictions on Huawei is good for some chip manufacturers, the impact on the global economic slowdown is marginal.

 

2.  Are lower rates good or bad?  Yesterday’s session was teed up to be a good one as it was a Monday, the first day of the new quarter, and fresh off of weekend news that the President restarted trade talks with China and met with North Korean Leader Kim Jong-Un to restart nuclear talks.  Stock futures were up, led by tech shares and the market opened higher.  Soon after the open, traders began to worry that if the trade problems were solved, the Fed may not be inclined to lower rates.  Stocks quickly pulled back from their highs.  Later in the morning session, Markit and ISM manufacturing numbers came in stronger than expected at 50.6 and 51.7 respectively.  Stronger manufacturing also means less likelihood of rate cuts.  The good news… or bad news added further weight to stocks.   There is still a 100% chance of -25 basis rate cut and a 23% chance of a -50 basis point cut in July, according to Fed funds futures.

 

THE MARKETS

 

Markets closed up yesterday on the news of a successful weekend reset with China.  More important than the headline number was the announcement that the President would ease restrictions on companies doing business with Chinese telecom equipment concern Huawei.  The announcement, though lacking details, caused the Information Technology sector to lead stocks higher, trading up by +1.45%.  Not surprisingly the tech sector itself was carried up by its semiconductor industry group, which rallied by +2.13.  The S&P 500 advanced by +0.77%, the Dow Jones Industrial Average climbed by +0.44%, the Russell 2000 traded up by +0.2% now solidly above its 200 day simple moving average, and the NASDAQ 100 jumped by +1.27%.  West Texas Intermediate Crude climbed by +1.06% to $59.09 as OPEC+ met in Austria and agreed to extend supply cuts.  Bonds traded off slightly and 10-year treasury yields climbed by +2 basis points to 2.02%.

 

WHAT’S NEXT

 

– US Vehicle Sales are expected to have declined to 17.00 million from 17.30 million seasonally adjusted annualized units.

– New York Fed President John Williams and Cleveland Fed Chief Loretta Mester will speak today.

– Earnings season kicks off in about 2 weeks when the first of the big banks announce their Q2 results.

daily chartbook 2019-07-02