Wall Street Seems More Optimistic on Foreign Investment, but Caution Remains

Investors got some reprieve from their latest worries over business relations between China and the United States.

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(Wednesday Market Open) Caution appeared to be the name of the game on Wall Street Wednesday morning.

Investors got some reprieve from their latest worries over business relations between China and the United States as the Trump administration signaled the government will use the Committee on Foreign Investment in the United States (CFIUS) to handle issues about foreign-owned companies purchasing U.S. tech companies. That’s a less stringent policy than what some on Wall Street had feared. Previously, investors were worried that the administration would impose more sweeping changes that would block some Chinese companies from investing in the U.S. tech sector.

It’s a reminder that headlines that often move markets can simply indicate negotiations between governments or within Washington and don’t necessarily reflect the nuances of a final outcome. In situations like this, it can behoove investors to stick to an already established plan, and not overreact to the rhetoric.

Packaged Foods Deal, Family-Sized

In merger and acquisition news, Conagra Brands (CAG) said it would buy Pinnacle Foods (PF) in a deal valued at more than $8.1 billion in cash and stock and more than $10 billion when debt is factored in.

In yesterday's report, we pointed to consumer staples as a relatively bright spot amid Monday's broad selloff. This latest potential megadeal in the packaged foods business might serve as a reminder that there's potentially still opportunity in the sector.

Tiptoeing Back In

The latest news on the foreign investment front seemed to help bring a note of optimism to early trading. But with stock futures pointing to a near steady open, many investors seemed to not want to jump back in full throttle.

It was a similar story yesterday as Wall Street rebounded after a steep selloff the previous session, which had apparently been driven by worries about global trade. But the major U.S. indices regained only a fraction of Monday’s losses as investors appeared to want to ease back into the waters instead of dive in.

Sentiment appeared cautious as worries about the global growth implications of a trade dispute between the U.S. and key trading partners China and Europe continued to hang over the market.

Although volatility remained elevated over last week’s levels, the Cboe Volatility Index (VIX), which settled just under 16 on Tuesday, was well below its Monday high above 19 (see figure 1 below). That may indicate that investors may be less fearful than they were at the start of the week, perhaps dialing worry down to simple caution.

Market Gets Some Energy

Energy was the biggest gainer among the S&P 500 sectors that were in the green Tuesday. Companies like Exxon Mobil (XOM) and Chevron (CVX) got a boost as oil prices rose sharply on news that Washington is pushing allies to stop importing oil from Iran by November or risk sanctions. Worries about supply from Libya and Canada also helped oil prices higher.  

Figure 1 FEAR INDEX POPS, DIALS BACK: The Cboe Volatility Index (VIX) surged from the low teens to just under 20 earlier in the week, but has since pared back half the gains, as trade fears seemed to calm. Data source: Cboe Global Markets. Chart source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Homebuilders Gain: It’s been a good week in housing market news so far. On Monday, new home sales data showed growth of 689,000 in May, topping the Briefing.com consensus forecast of 666,000. Then on Tuesday Lennar (LEN), the nation’s largest homebuilder, saw its shares jump more than 4.8% after it reported Q2 revenue and earnings per share that beat Wall Street expectations. Chairman Stuart Miller was upbeat on the conference call accompanying the results, and other homebuilders also gained. Still, it remains to be seen whether Lennar’s results become a long-term trend in a market that is facing headwinds including higher lumber and steel prices and an interest rate environment that might cause some to shy away from taking on a mortgage.

Gold and the Dollar: Gold is often considered a safe-haven investment that investors buy when the market is tanking. So it’s notable that the precious metal has fallen to its lowest point in more than six months even against a backdrop of worry about global trade. What gives? Well, it turns out that gold is also really sensitive to interest rates. The Fed’s move to raise interest rates has given a boost to the U.S. dollar. That makes dollar-denominated gold more expensive and could dampen demand. But rising rates can also lift bond yields, making gold, which doesn’t pay interest or dividends, less attractive as an investment. So, while the metal may get some support from trade worries, it’s also generally under pressure as the dollar gains.

Banks and Rates: Although the S&P 500 financial services sector was down on the day Tuesday, big banks Citigroup (C), Bank of America (BAC), JP Morgan Chase (JPM) and Goldman Sachs (GS) eked out gains. Talking about the big banks can raise the question of their performance versus interest rates. A rising rate environment tends to be good for the banks because they can charge more on loans. But it’s an interesting story that could be worth watching because investors seem to have already priced in about a 3% yield on the 10-year Treasury. So it may be tough to make a case to buy the banks at their current prices as the yield is below 3%. It also remains to be seen whether the banks can reap as much in Q2 earnings from trading as they did in the first quarter. At the same time, investors might not want to sell the banks given that rates are moving higher. This might give investors who want to trade the banks day to day plenty to chew on. For those holding the banks over the longer term, they may have to ignore a lot of noise.

Good Trading, 

JJ

@TDAJJKinahan 

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This Week’s Economic Calendar. Source: Briefing.com
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