Things feel a little more stable this morning after yesterday’s rout, encouraged by China’s move to stabilize the Yuan. Disney is expected to report after the close.
(Tuesday Market Open) Stabilization is the word of the day. The Chinese currency stabilized overnight, and so did stocks around the world.
That doesn’t mean we’re out of the woods. A trade deal with China is probably just as far away as it was yesterday, and it’s unclear what the next step is going to be. Goldman Sachs says it doesn’t expect the two countries to resolve their differences before the end of the year. Caution could be another word to keep in mind, and rallies in gold and U.S. Treasuries likely reflect plenty of that.
One thing that’s becoming more clear is that this isn’t a one-day affair. That’s not necessarily bad, because it might be healthier for the markets that way. We had some volatility and that smashed things around yesterday. The situation looks better so far today, but you never know. Things might change.
After yesterday’s 3% decline, it feels like July and its record highs never happened. The flight from risk that began last week and picked up steam Monday has stocks back at levels last seen in June. Stocks tanked in overnight trading after the U.S. Treasury Department’s decision to declare China a currency manipulator, only to turn around and go back into the green after China set its currency at a level above expectations.
As of early Tuesday, the Chinese Yuan was trading at 7.02 to the dollar, still near its weakest point in a decade but a little firmer than the 7.05 level that traded in the overnight hours.
China not further weakening its currency doesn’t seem like a really stable foundation for a rally, but strength ahead of the opening bell probably reflects some relief that things aren’t even worse. It was an encouraging development, but the two countries are still pointing fingers at each other and markets are the monkey in the middle.
Anxiety still seems elevated, but maybe a little less than last night. Crude rose a bit, which might reflect hopes for improved demand. The Cboe Volatility Index (VIX) remained above 20, but was down from levels above 22 seen yesterday. The bond market still looks a bit nervous, with the 10-year Treasury yield up just a bit to 1.75%. Stocks start the session down 6% from last month’s all-time highs.
Key technical support at the S&P 500’s (SPX) 200-day moving average just under 2800 got breached during the overnight plunge (see chart below). The SPX bounced back pretty convincingly after that, but the area around 2800 has a lot of support and could be an important level to watch if stocks start falling again.
The rout in equities over the last week turned things around as far as rate cut expectations, which had pulled back last Wednesday after Fed Chairman Jerome Powell sounded less dovish than many had expected. Odds are 100% for a rate cut in September, with 22% odds of a 50 basis-point slice, according to CME Group futures. By year-end, futures show a nearly 90% chance of rates being cut twice from here and more than 40% odds of three or even more additional cuts.
The projected rate cuts come despite economic growth that’s been weak but not necessarily terrible. The government said Q2 gross domestic product increased 2.1%, which means the U.S. economy still looks like it’s in decent shape. That’s something investors might not want to lose sight of here in this rough trading environment.
However, fears of the trade war’s impact on economic growth might start to grow as we look toward Q3 and Q4. The holiday season is coming into play again, and last year’s got clipped by trade tensions. Retail earnings loom later this month, and the trade war’s effect on holiday shopping might be a topic executives get asked to address.
At times like these, a pattern frequently happens in the market, with yesterday a great example. There’s an initial flight from perceived danger out of Technology and other cyclicals and into fixed income, gold, and the Cboe Volatility Index (VIX). Then stocks in areas supposedly more shielded from trade tension like Staples and Utilities often get a bid.
However, one difference this time compared to sell-offs last fall and this spring is just how low the U.S. 10-year yield is, recently trading at around 1.7%. When the market had its initial tariff tantrum last year, the yield was well above 3%.
This means bonds are priced much higher now than they were then, so it’s questionable how many investors might want to pile into Treasuries at this point. The wild card is overseas investors, who probably see 1.7% as a great return compared with negative returns for bonds in Europe and Japan.
The way this week started in the market, it would be understandable if some investors feel like taking a break to see a movie. This afternoon, Walt Disney (DIS) reports, and its movie business, as always, is expected to be a key part of the story. Last time out, the Studio Entertainment division experienced a year-over-year revenue drop, which the company blamed in part on tough comparisons. Aladdin was a big movie for the company in the latter part of its fiscal Q3 this year.
Aside from that, however, focus could veer toward streaming and what the company’s plans are for competing with established players once it starts its own platform later this year. In its last earnings call, DIS committed to providing subscriber numbers for Disney+ once it launches.
Uber (UBER) and Lyft (LYFT) earnings are due later this week (see more below).
As of Monday, 77% of S&P 500 companies had reported Q2 earnings, with 76% of companies reporting a positive surprise. The blended earnings growth currently stands at -1%. Positive earnings surprises in multiple sectors, led by Healthcare and Energy, resulted in an increase in the growth rate from -2.7% a week ago.
Shake Shack (SHAK) delivered nice earnings late yesterday with “same-shack” store sales growing 3.6%. Investors rewarded the stock, which was up more than 3% in pre-market trading. Consumers keep coming out to play despite the market’s gyrations.
Battle of the Yields—Stocks vs. Treasuries: While stocks retreated Monday, bonds rallied and 10-year Treasury yields plunged to their lowest point since 2016. At this low level near 1.7%, it sets up what normally would look like a positive situation for dividend stocks to find some additional interest. The 10-year yield is now pretty close to the S&P 500’s average dividend yield, which could help explain why Consumer Staples and Utilities—two sectors with traditionally high dividends—appear to holding up a little better against the bearish tide so far this week. Utilities were the only sector to actually post some gains Monday.
Last fall when the market was also wrestling with trade fears and cyclical sectors like Technology and Industrials were taking it on the chin, a few stocks stood out as decent performers. They included PepsiCo (PEP), Procter & Gamble (PG), and Coca-Cola (KO). It could be interesting to see if investors flock back to some of these Staples names as the flight to safety continues, though no market investment is ever truly “safe.”
Unicorn Spotting. If you get the sense that the IPO market has been heating up recently, you’re not imagining things. Of course, Beyond Meat (BYND) has claimed the spotlight this year with its meteoric rise. BYND is still up about 170% since its May 2 debut, even after a recent slide. The Renaissance IPO Index, which follows recent major IPOs like Spotify (IPO) and Roku (ROKU), is up about 38% so far this year as of Aug. 5.
This week, investors have a few new IPOs to consider keeping an eye on. Hong Kong-based investment bank (HKIB) began trading on Monday. Lately, HKIB has been able to grow revenue even as many Asian economies have been slowing. InMode (INMD), an Israel-based company that supplies medical aesthetic products, is scheduled to hit public trade on Aug. 7, aiming to raise about $75 million, which puts it on track for a market cap of about $611 million.
Need a Ride? Uber, Lyft Results Ahead: Speaking of IPOs, this week’s slate of earnings includes ride-sharing rivals Lyft (LYFT) and Uber (UBER), which were both among this year’s major offerings. We’re giving investors a detailed preview of UBER in a separate article, but, in a nutshell, it seems highly probable that we can expect more losses from them both, according to analysts. One thing to consider listening for in the executives’ calls is how these companies plan to compete with each other, whether their pricing wars will continue, and how their costs might be affected as a result.
Also, both companies have recently lost both their chief operating officers, meaning the conference calls likely could include some questions about the company’s internal plans. LYFT reports tomorrow afternoon and UBER reports Thursday afternoon.
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