Market Sentiment Appears to Remain Positive on US-China Trade Relief

With the fear over trade between the United State and China seeming to have lessened, that leaves market participants to focus on a U.S. economy that is apparently healthy, inflation that isn’t troublesome and corporate earnings that by and large have been solid.

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Key Takeaways

  • Jobless claims fall to their lowest point since 1969.

  • The 10-year Treasury yield remains above 3%.

  • The VIX remains below 12.

(Thursday Market Open) Stock market sentiment appears to continue to be positive in the wake of trade announcements from the U.S. and China that weren’t as tough as they could have been.

With the fear over trade between the world’s two largest economies seeming to have lessened, that leaves market participants to focus on a U.S. economy that is apparently healthy, inflation that isn’t troublesome and corporate earnings that by and large are solid. 

Amid the positive sentiment, which continued for the U.S. on momentum after European stocks were higher and Asian indices were mostly in the green, the yield on the 10-year Treasury remained above the psychologically important 3% level while the market’s main fear gauge, the Cboe Volatility Index (VIX) was below 12, both indicating calmer nerves among market participants.

Although worries about the trade dispute between the U.S. and China appear to have eased, Alibaba (BABA) chief Jack Ma said in an interview with Chinese state media that his promise to create 1 million American jobs couldn’t be fulfilled because of the escalating trade dispute.

While market volatility as a whole was subdued, one stock continued to show wild swings. Canadian marijuana company Tilray (TLRY) was up around 6% in pre-market trading this morning after rising more than 38 percent Wednesday, despite actually briefly trading lower. Amid the volatility, trading in the stock was halted five times. Such a wild ride can serve as a lesson about making sure you’re knowledgeable about what stocks you’re getting into.

Economic data this morning showed that U.S. weekly jobless claims fell to 201,000 from 204,000. Economists had been expecting a jump to 209,000, according to a consensus provided by Briefing.com. The surprise drop took initial claims to their lowest level since 1969 in an indication that the nation’s tight labor market continues.

Yield Winners … 

Relief over the latest round of tariff announcements appeared to pave the way for declining worries on Wall Street to help boost 10-year Treasury yields on Wednesday. That in turn seemed to lead to a rally in banks.

The 10-year yield approached 3.1% on Wednesday. Higher longer-term yields can reflect optimism about the economy and help boost banks’ ability to charge more on loans relative to what they pay on deposits. 

So it wasn’t a surprise to see the financial sector gain the most of the 11 S&P 500 (SPX) sectors on Wednesday, rallying 1.76%. 

… and Losers

But higher longer-term yields can also spark worries about higher corporate borrowing costs and pressure sectors considered to be “bond proxies." Of these, the utilities sector was the biggest loser Tuesday, dropping more than 2.1%. Telecom and real estate also lost substantial ground. Consumer staples fell slightly.

These sectors often compete with bonds as investors search for yield. When bond yields rise investors tend to rotate out of bond proxies as stocks tend to be considered riskier than government-backed fixed income securities.

Because government bonds are often considered safer, investors tend to buy them in times when they are worried, pushing the price up and the yield down because the two move inversely. 

So, when fear lessens, investors may choose to sell bonds, thereby raising their yields. It appeared this was the case Wednesday as worries about trade lessened.

Volatility Falls Along With Fear

The VIX dropped more than 8% Wednesday, making an argument that the market’s current thinking is that the outcome of trade disputes may not be as bad as some observers have thought.

Worries over trade between the United States and China, the world’s two largest economies, as well as other trading partners have been dogging Wall Street for some time now over concerns the disputes could dampen global economic growth.

FIGURE 1:   Oil Gusher: Crude has had a little rally over the last two weeks and is approaching recent highs, though it remains below the three-month peak above $75 a barrel. Meanwhile, gold (purple line) continues to languish. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Rising Interest Rates: Based on Fed funds futures on Tuesday, the market is all but certain the Federal Reserve will announce an interest rate hike after the conclusion of its meeting next week. What is perhaps more interesting is that Fed funds futures are now showing a more than 80% probability of another rate hike in December. Two more rate hikes this year would seem to indicate monetary policy makers see the economy growing strongly enough that they need to take action to stave off potentially problematic inflation. But higher interest rates also can crimp corporate borrowing costs, and they can make buying a house more expensive. According to the National Association of Home Builders, housing — including construction and spending on housing services such as rent — contributes between 15%-18% to gross domestic product. So let’s take a deeper look (below) into the housing market.

Groundbreaking and Future Construction: The latest government data on the housing market, released Wednesday, painted a mixed picture. Housing starts rose more than 9% from July to August to 1.282 million units, a better showing than the 1.229 million units expected by a consensus of economists provided by Briefing.com. But building permits, a leading indicator, dropped month-over-month to 1.229 million units in August, lower than the 1.310 million units than had been expected. While the housing starts in the short term may help with low availability of new units, it looks like longer term the housing market may continue to see low inventories that have pushed home prices higher. It looks like lack of availability combined with rising interest rates and more expensive materials such as steel and lumber may continue to be headwinds for home affordability.

Paying Bills With Home Equity: Having the ability to tap into home equity for extra cash is one of the benefits of being a homeowner, but many are reluctant to do so, according to Bankrate.com. Interest rates that are on the rise and memories of the housing crash may be reasons behind this reluctance to cash in on home equity, according to Bankrate.com. However, if homeowners were to tap into their home equity, around 75% said doing it for home improvements or repairs would be a good idea, a new survey said. However, in a somewhat troubling statistic, 15 percent said using the money to keep up with regular household bills would be a good use for the cash. Lower income households were more likely to hold this view, indicating they lack the funds to cover unexpected or expected expenses. “That nearly 1 in 6 Americans view ‘keeping up with regular household bills’ as an appropriate reason to borrow from home equity speaks to how far some households are stretched on a monthly basis,” according to Greg McBride, chief financial analyst for Bankrate.com. It seems likely that rising interest rates could affect home equity debt costs, adding further strain on cash-strapped consumers.


Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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