A report by The Wall Street Journal said the United States and China are working on a possible delay of the Dec. 15 tariffs.
(Tuesday Market Open) If you woke up this morning to see some premarket jitters, it might have been due to a report by the South China Morning Post stating it’s increasingly unlikely that a U.S.-China deal will get done this week as U.S. officials focus on a trade pact between the United States, Mexico, and Canada. But a subsequent report by The Wall Street Journal said the two nations are working on a possible delay of the Dec. 15 tariffs.
Equity index futures erased early losses to move into the green by the opening bell.
A postponement or cancelation of those duties would likely please stock market participants, at least if the two sides can’t reach an interim deal before then. The world’s two largest economies have been trying to hammer out a deal for some time now, and uncertainty surrounding the trade situation has been the biggest headwind facing Wall Street.
But recently, excitement about a partial trade deal getting done soon has helped push the market to record highs. In November, optimism around trade, as well as better-than-expected earnings helped spur TD Ameritrade clients to increase exposure to the market and end the month as net buyers of equities, according to the Investor Movement Index® (IMXSM). The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.
TD Ameritrade clients continued to slowly up exposure, with the index increasing to 5.17, up 6.8% from October although still lower than historic averages. Investors continued to be net buyers of Disney (DIS) and Microsoft (MSFT), and they bought McDonald’s (MCD), seeing a bargain opportunity after the stock lost value. They were net sellers of Bank of America (BAC), Citigroup (C), and Tesla (TSLA), after those stocks had runups.
In corporate news, Toll Brothers (TOL) reported revenue and earnings that beat expectations and forecast above-consensus home deliveries for this quarter. The optimistic outlook bodes well for that portion of the housing market, adding to the narrative that the U.S. economy is still chugging along despite the ongoing trade angst.
On Monday, the market pulled back as investor nervousness appeared to ratchet up ahead of a host of factors that could influence trading for the remainder of December. But, despite a rise in the Cboe Volatility Index (see more below) and some Treasury buying, it didn’t seem like the selling in equities was anything out of the ordinary. After last week’s gains, some investors and traders may have wanted to start the week off with some profit taking.
Fresh numbers from China that showed a drop in November exports indicated that the trade war continues to be a drag on its economy. While that doesn’t bode well for oil demand—the numbers helped pressure crude prices on Monday—it could end up being a positive for the global economy if it ends up pressuring China to get a deal done sooner rather than later to stave off more economic harm.
As you might expect when trade jitters ratchet up, the Information Technology sector was one of the weaker spots in the market Monday. Trade-sensitive Apple (AAPL) lost 1.4% while the PHLX Semiconductor Index (SOX) also lost ground.
Meanwhile, across the pond, investors are eyeing an election this week in the United Kingdom and a European Central Bank meeting. While it doesn’t seem like the ECB will issue any major shift in monetary policy, the UK election will determine who controls Britain’s exit from the European Union. Brexit has been another big source of uncertainty for the market, as it’s unknown exactly how the unprecedented divorce will affect the European and global economies.
The ECB isn’t the only monetary policy-setting body meeting this week. The Federal Reserve starts its meeting today with a policy announcement expected Wednesday. The central bank is also expected to release a new “dot plot” showing where the Federal Open Market Committee members expect rates to go over the next couple of years.
As of late Monday, the futures market was pricing in a near certainty that the Fed will leave its key short-term interest rate unchanged.
Even though it doesn’t seem like the Fed will alter rates at this week’s meeting, it could still be interesting to see whether policy makers weigh in on last week’s bumper jobs report and if the language accompanying Wednesday’s rate decision gets interpreted by the market as more hawkish as a result.
CHART OF THE DAY: JUGGLING THE NEWS. On a day when stocks drifted lower—the S&P 500 fell about 0.3%—it might be a bit of a head-turner to see the Cboe Volatility Index (VIX) jump 16%. Perhaps it's a reflection of the number of economic balls in the air right now that investors are trying to juggle. Still, there wasn’t a sense that anybody was running for the exits as the VIX was still below its long term average around 18 (purple line). Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Hearing From the New ECB President: Even though the ECB isn’t expected to change its monetary policy stance at its meeting this week, ING’s chief economist in Germany doesn’t think the meeting will be boring. Of note is that the meeting will be Christine Lagarde’s first policy-setting meeting after replacing Mario Draghi as the central bank’s president. “The excitement to the run-up doesn't really stem from possible policy changes but rather from how her communication style will differ from Draghi,” wrote Carsten Brzeski, ING’s chief economist in Germany. “We don’t expect Lagarde to structurally change the introductory statement but will be looking for any changes in style and language in the Q&A session.”
European Growth Lagging: Lagarde takes the helm of the ECB at a time when, according to ING, the eurozone economy is “somewhat stabilizing” and inflation is well off the central bank’s target. According to September projections, eurozone GDP was expected to come in at 1.1% this year and 1.2% next year, while inflation was expected at 1.2% and 1%, respectively. “If anything, a slightly weaker euro exchange rate and somewhat higher oil prices could lead to a very minor upward revision of the 2020 inflation forecasts,” Brzeski wrote. “At the same time, (with) the lack of clear indications for a rebound in manufacturing and the rather optimistic growth profile for 2020 in September, another smaller downward revision of the growth projections looks likely.”
U.S. Economy Growing Faster: Even though the U.S. economy isn’t going gangbusters, it’s still performing better than Europe’s and is expected to continue that trend in 2020. The jobs report last week helped to bump up the Atlanta Fed’s GDPNow forecast for Q4 to 2% on Friday from 1.5% the day before. With European growth continuing to be slow, it seems like the U.S. economy will continue to be a bright spot in the global economic picture, especially if the trade war continues to drag on. Despite that global headwind, the U.S. economy has been underpinned by a strong jobs market, which seems to be helping boost consumer spending.
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