Caution Flag Waving: Trade Still In Focus After Friday’s Late Plunge

Trade jitters could still be the focus today, without much other news on the front page. Volatility is likely to remain elevated.

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(Monday Market Open) Trade war jitters took the wind out of the sails of last week’s quick rally, and the question heading into the new week is whether this same issue might keep waving a yellow “caution” flag at the market. One thing seems pretty sure: Volatility is likely to continue, which could keep things choppy.

Early Monday, pre-market trading pointed toward a chance of the market gaining back some of the ground it lost Friday. Stocks in Europe and Asia were mostly higher overnight as Asian markets seemed to shrug off the tariff talk. Some of the more “defensive” indicators like gold and bond prices (which move inversely to yields) were lower, perhaps a sign of investors being ready to potentially step back from so-called “safe havens,” at least for the moment.

News could be a bit light today, with no speeches from any Fed officials scheduled and no major data on the calendar. If you’re a long-term investor, fasten your seatbelt because the ride might continue to be bumpy.

The S&P 500 Index (SPX) opens the week near correction territory, down more than 9% from the all-time high posted in late January. The Nasdaq (COMP) is down a similar amount, while the Dow Jones Industrial Average ($DJI) is in correction territory, down 10% from its January high. Interestingly, the small-cap Russell 2000 (RUT) hasn’t done as badly, down roughly 6% from its highs. That might reflect thoughts that small-caps could potentially be less exposed to dangers from a trade war, since more of their business tends to be domestic.

Weekend of Tariff Politics

Over the weekend, administration officials appeared on talk shows saying they’re trying to reach a trade deal with China and are willing to work with the Chinese, according to media reports. President Trump is pushing proposals to impose duties on $150 billion worth of Chinese goods, with China threatening to respond with tariffs on $50 billion in U.S. goods.

One school of thought is that two camps in the White House are struggling for prominence on trade, with one camp eager to impose tariffs and the other urging a more cautious approach. Meanwhile, numerous business leaders made clear in the media last week that they’re opposed to a trade war, so it’s possible the administration might be feeling some pressure.

Congress comes back this week, and we’ll see if there are any cross-town fireworks between Republicans on the Hill and their counterparts on Pennsylvania Avenue. Some GOP congressmen from agriculturally important states like Iowa and Nebraska, in particular, have expressed frustration with the administration’s recent course on trade policy.

A Technical Key?

Maybe one thing bulls can hang their hats on is the S&P 500 Index’s (SPX) ability to finish the day Friday above a critical support point at 2601, which wasn’t far above the 200-day moving average. It might seem like a small victory on a day when the bottom fell out, but it’s something. Technically-oriented investors might want to keep an eye all this week on that 200-day moving average, which the SPX briefly fell below last week before the slight recovery. Historically, markets appear to do worse when the market is under the 200-day, some analysts said, though past isn’t precedent.

Tech Goes to Washington

Though jobs and trade dominated the headlines late last week, tech could return to the spotlight in the days ahead. Many long-term investors now have shares of the so-called “FAANG” stocks in their portfolios, so they might want to take a close look as Facebook (FB) CEO Mark Zuckerberg steps in front of Congress in two separate hearings Tuesday afternoon and Wednesday morning as legislators address recent privacy concerns. Though FB will be in the crosshairs, the way the market has moved recently, any weakness or rebound in FB shares associated with the testimony could conceivably spread to other tech stocks. This applies even to stocks like Amazon (AMZN) and Alphabet (GOOG), which have very different business models than FB. Shares of FB are down about 14% since the privacy issue first hit the headlines in March.

While investors will likely pay close attention to the hearings, it’s important to remember there’s not a big chance for Zuckerberg to “win” by testifying, analysts said. These type of hearings are often more of a forum for legislators to make speeches than for CEOs to make their case. Though the Republican Congress has talked about cutting back on regulation, some analysts fear the hearings could be one step along the road to some form of privacy legislation, Investor’s Business Daily reported. That could have an impact not just on FB, but also on other ad-based Internet companies like (GOOG), Snap (SNAP), and Twitter (TWTR). Stay tuned.

Banks to Kick off the Earnings Parade

Later this week there’s probably going to be a major diversion in focus as big banks start reporting, the traditional harbinger of earnings season. Wells Fargo (WFC), Citigroup (C) and JP Morgan (JPM) all report before the open Friday, and we’ll be posting earning previews for the big banks ahead of the results. The reporting season could serve as a welcome distraction for investors who may be worn out by all the headlines of the last few weeks, but it’s not necessarily going to end the volatility. It looks like volatility is here to stay for a while, possibly into next month.

SPX

FIGURE 1: TALE OF TWO SESSIONS.

After rallying smartly on Thursday in broad-based action, the S&P 500 (SPX) turned tables Friday amid fresh trade concerns, as this two-day candlestick chart shows. Treasury bond yields (purple line) had been rallying Thursday along with the SPX, but quickly scurried back below 2.8% for the 10-year as stocks retreated Friday. Data source: S&P Dow Jones Indices, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Seeking Middle Ground at Fed: Fed Chair Jerome Powell stayed in the rhetorical middle of the road on monetary policy Friday, and shared a word many long-term investors must feel familiar with by now: “Gradual.” Specifically, he said, “Over the next few years, we will continue to aim for 2% inflation and for a sustained economic expansion with a strong labor market. I believe that, as long as the economy continues broadly on its current path, further gradual increases in the federal funds rate will best promote these goals.”

The wording doesn’t sound much different than what we often heard from former Fed Chair Janet Yellen. However, some analysts said Powell’s language might have contributed to Friday’s sell-off, simply because he showed no change in commitment to gradual rate hikes. The next chance for investors to get a sense of inflation — a major component that helps drive the Fed’s rate decisions — is the release of March producer price index (PPI) and consumer price index (CPI) in the coming days. PPI is due Tuesday and CPI on Wednesday.

Hike Chances Ease A Bit After Jobs Data: Speaking of the Fed, the weak jobs growth in March caused a slight pullback in expectations for rate hikes this year. However, Fed funds futures still indicate a very strong chance of two more hikes on top of the one we saw last month. The next rate hike is expected to come by the time of the Fed’s June meeting, where odds fell to 77% on Friday after the jobs report, down from 83% the previous day. That still looks like a very high probability. The chance of a hike by the time of the Fed’s September meeting now rests at around 50%, down from 60% before the jobs report. A fourth rate hike appears less probable now, with odds at 25%. That’s the lowest chance of a fourth rate hike in some time. The figure had been hovering in the low-30s for weeks. 

Buicks and iPhones: Over in China, there’s starting to be some social media chatter of boycotting U.S. goods as fears of a trade war ramp up, CNBC reported Friday. Among the messages the network picked up were calls for Chinese consumers to stop buying U.S. cars and Apple (AAPL) iPhones. Both are big sellers in China, where brands like General Motors’ (GM) Cadillac and Buick have found a big market. Buick, for instance, sold more than one million vehicles in China in 2016, representing about 80% of all vehicles the brand sold. Cadillac recently said it plans to open 50 new showrooms in China this year and have 300 dealerships by 2020, according to the South China Morning Post. It’s unclear whether the messages on Chinese social media originated from individual people or perhaps were part of a more coordinated effort to drum up anti-U.S. sentiment, but it does indicate one possible direction this trade tiff might go if it continues.

Good Trading,
JJ
@TDAJJKinahan

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