Rhetoric, Meet Reality: Enthusiasm Ahead of G-20 Might Need Tempering

The big story Friday is tonight’s meeting between Presidents Trump and Xi. Expectations are high going in based on positive rhetoric, but investors might want to consider tempering their enthusiasm.

6 min read
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Key Takeaways

  • Big night ahead for trade as Trump, Xi plan to meet
  • Trading likely to remain thin ahead of G-20
  • Financial sector appears to get lift from banks passing stress test
(Friday Market Open) Expectations are high ahead of tonight’s meeting between the U.S. and Chinese presidents, but will reality match the rhetoric?

That’s the big question. There’s a lot of optimism going in based on pre-meeting rhetoric, but people need to consider tempering their expectations. It would be best if the two leaders came out and said talks were really good and they’ll continue. It’s way too much to expect any major breakthroughs.

Positive outcomes are nice to think about, but it’s also possible the weekend could end with a stalemate and threats of more tariffs. There’s also the chance of confusion, which we saw after President Trump and Xi’s December meeting in South America where the two sides left town telling conflicting stories about what they agreed to. 

By the end of the weekend, we’ll see if expectations and rhetoric match the reality, and that’s really the big story today. Trading could be thin and volatile as the meeting approaches.

That’s why anyone going into or out of the market today might want to consider taking extra care, and caution might prevail in general. It seems unlikely that too many people would want to jump into big new positions with the market on tenterhooks this way. A low-volume, high volatility session wouldn’t be surprising. That said, the Cboe Volatility Index (VIX) did ease a bit late Thursday back below 16 and is still there Friday morning. It’s hard to imagine it going much lower before we’re through with G-20.

Whenever a weekend brings big news, it can be helpful to watch how Asian markets and U.S. stock futures trade Sunday night. Any developments there could potentially be magnified once the U.S. trading day starts on Monday. We’ll be back here Monday morning around the opening bell with analysis of the weekend’s events.

No Stress: Banks Pass Exam

In corporate news, U.S. big banks passed the test and the Financial sector appears primed for a Friday lift. The Fed’s annual stress test, that is. The nation’s largest banks all have strong capital levels and meet the Fed’s capital planning expectations, the Fed said. In non-financial talk, this means the Fed thinks they can all survive a severe recession. 

Several of the big banks announced new buybacks and increased dividends late yesterday after the Fed’s all-clear, giving the Financial sector a potential boost heading into Friday.

Financials are catching an updraft despite 10-year yields getting beaten back down toward 2%, Typically, Financials take some heat when yields fall because that tends to hurt banks’ net interest margins.

Lately, though, the relationship between Treasury yields and Financial stocks has arguably gotten a little mixed up. It might actually be logical, though, if you look at how markets have traded over the last month. The elevated Cboe Volatility Index (VIX) and all the ups and downs in Treasuries could mean good news on the trading front for many investment banks. The S&P 500 Index (SPX) has also had its spikes and dives over the last quarter, providing potential trading drama for those who like to actively participate.

The thinking could be that we’ve had a good trading quarter, so maybe trading volume could make up for some of the pressure on net interest margins when we hear big banks’ Q2 results the week of July 15. The VIX never went back down much below 15 over the last two months, something that can kill trading activity. Financials rose almost 1% Thursday, but still lag the SPX year-to-date. 

Nike Still Holds Court in China

The other big corporate news heading into today was Nike (NKE) breaking precedent with an earnings miss. It was the first time NKE missed expectations in seven years, according to various media. Earnings per share of $0.62 compared with third-party consensus for $0.66, while revenue of $10.2 billion just barely topped the $10.17 billion consensus estimate. Shares fell in post-market trading despite the revenue beat but were down less than 1% heading into Friday’s open.

Despite the bottom-line miss, the numbers for NKE looked pretty good. There were high expectations going in, which could explain why the stock is down. NKE had a nice surge in North America with online and same-store sales growth, and also got some benefits from currency. It’s also interesting to see that NKE continued to downplay the risk of tariffs, and said it hasn’t seen any impact to date from the trade battle.

Going into NKE’s results, a lot of analysts had been telling investors not to worry too much about NKE’s exposure to China. NKE and other shoe companies rely heavily on imports from there. Sales in China rose a solid 22% in the company’s fiscal Q4, down just slightly from their 24% climb the quarter before. North American sales growth was 8%, up from 7% in Q3.

Quarterly House-Cleaning

Investors might want to consider being on the look-out today for last-minute “window dressing” as the quarter draws to a close. It’s a practice by fund managers designed to make portfolios look more palatable before those quarterly progress reports go to clients in the mail. So you might see some money shifting out of the poorer-performing sectors into sectors with more shine, and into some stocks with big recent gains. 

This potentially could imply further gains for stocks and sectors that already are doing well, and more pressure on poor performers. Sectors with glowing records lately include Technology, Industrials, and Consumer Discretionary, all of which made strong recoveries this month from their May malaise.

Another “hot” sector lately is semiconductors, which put on the afterburners late this week after strong results and positive guidance from Micron (MU). That rally might have gotten some additional support Wednesday and Thursday from last-minute moves by funds to dress up their clients’ portfolios with the latest exciting names before the quarter ends.

In case you’re wondering, the worst-performing sectors over the last month are previously high-flying Utilities and Real Estate.

In data news early Friday, Personal Consumption Expenditure (PCE) prices rose 0.2% in May, which was in line with Wall Street’s expectations and down from 0.3% the previous month. Core PCE rose 0.2%, a little above the 0.1% analysts had expected. Still, the numbers don’t look too worrisome from an inflation perspective, nor would they seem to point toward any big change in the Fed’s economic outlook.

Figure 1: SMALL CAP, BIG RALLY. After lagging the S&P 500 Index (SPX - purple line) for most of the past few weeks, the Russell 2000 Index (RUT - candlestick) closed the gap considerably on Thursday, rising 1.9% on a day when the broader-based index edged higher. Data sources: S&P Dow Jones Indices, FTSE Russell Indexes. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Anyone Hungry? Two disappointing earnings reports this week from food companies General Mills (GIS) and ConAgra (CAG) not only continue to weigh on the Consumer Staples sector, but also highlight how people are making their dining choices. Staples stocks are up around 14% year-to-date, only slightly behind the 16% rise in the S&P 500 Index (SPX). Over the last month, though, Staples are up less than 1%, compared with 3% gains for SPX. This might partly reflect some investors diving back into “cyclicals” like Technology and Industrials recently amid hopes for progress on the trade picture, and also a little profit-taking after the “defensive” sectors made big gains. However, these earnings could raise questions about fundamentals for major food manufacturers whose stocks are shelved in the Staples aisle.

You never want to make too much out of a single quarter’s results, and some analysts say CAG is well positioned from a brand standpoint. However, it’s hard not to notice that the two companies whose earnings failed to satisfy investors’ appetites this week were both packaged-food makers at a time when many consumers, especially younger people, appear to be veering toward fresh food and making their own meals. Even CAG admitted that some of its weakness is due to aging brands. As The Wall Street Journal pointed out, constant innovation is necessary just to maintain sales in today’s food market, and the frozen foods section is very competitive. CAG highlighted its plant-based meat product in an investor presentation, the WSJ noted, perhaps a sign that the company recognizes the need to stay out in front.

I’ll Have Something Small: Small-caps led the charge on Wall Street Thursday, with the Russell 2000 (RUT) up 1.9%. This could reflect some people putting money into companies with less international trade exposure ahead of the G-20. Last year, small-caps outpaced large caps for a while as trade fears brewed. Smaller companies are often have a bigger percentage of domestic sales than the large-caps. That said, the SPX has outperformed RUT over the last month, and semiconductors—which probably have more China exposure than most sectors—also gained ground Thursday.

GDP Growth Seen Slowing After Strong Q1: Even as the Q1 gross domestic product ended up at 3.1% according to the government’s final estimate, the Atlanta Fed’s GDP now forecaster came down a notch this week to 1.9% for the current quarter. That’s down from its previous 2% estimate, and reflects this week’s durable goods orders and advance goods trade balance. The GDP now is actually above the 1.6% average prediction of analysts surveyed by The Wall Street Journal. If Atlanta Fed’s prediction proves right, Q2 would represent the weakest U.S. quarterly GDP growth since Q1 2017 more than two years ago. The last quarter worse than the WSJ economists' 1.6% projection was Q1 2016.

Good Trading,



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Economic calendar for week of June 24. Source: Briefing.com


Key Takeaways

  • Big night ahead for trade as Trump, Xi plan to meet
  • Trading likely to remain thin ahead of G-20
  • Financial sector appears to get lift from banks passing stress test
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