Morning Trading Subdued as Market Looks To Afternoon Comments from Mnuchin, Powell

Investors may be looking to congressional testimony from Treasury Department and Fed leaders for signs that the economy is getting better. Such commentary from the Fed and Treasury could be another catalyst to take the market higher, but if the leaders are more somber, it could be a signal for the market to pause or resume selling.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Caution: Return of volatility
5 min read
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Key Takeaways

  • Micron beats on top, bottom lines, gives encouraging guidance
  • Extra volatility possible as today marks the end of month, quarter, half

  • FedEx reports earnings after the close

(Tuesday Market Open) The morning trading session looks like it’s shaping up to be a quiet one as market participants wait for testimony from Federal Reserve and Treasury Department leaders this afternoon.

Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin are scheduled to address the House Financial Services Committee at 12:30 p.m. Eastern time. They’re slated to discuss the Fed’s and Treasury’s economic response to the pandemic. 

Investors and traders may be looking to the two economic leaders for more guidance as the number of coronavirus cases in the United States rises and forces some states to backtrack on their reopening plans. That has been a source of worry for Wall Street, creating some sharp selling last week.

If the commentary from the Fed and Treasury is upbeat, that could be another catalyst to take the market higher, but if the leaders are more somber, it could be a signal for the market to pause or resume selling.

Market participants may also want to keep in mind that today is the last trading day of the month, quarter, and half year, which could mean some investors and traders may want to adjust their portfolios heading into the close. That could add to potential volatility during this holiday shortened week when some people may be on vacation.

In corporate news, Micron Technology’s (MU) shares were up more than 6% this morning after the company reported better-than-forecast earnings and revenue. The company’s revenue guidance also seemed to encourage investors. With its chips in demand as stay-at-home employees and students use the internet to work and learn, Micron is one of the companies investors can use to get exposure to the new realities of the economy during the pandemic.

Later today, after the close, FedEx (FDX) is expected to report results for its latest quarter. The company has helped enable an increase in online shopping as the coronavirus forced people to stay at home and kept shops closed. So it could be interesting to see if executives talk about how that trend is going. It could also be interesting to see if they say anything about their outlook on the economic reopening.

Risk Switch Flips to “On”

The stock market surged Monday, indicating that at least some of the selling from late last week may have been participants de-risking their portfolio ahead of the weekend.

Although the news flow over the weekend was largely dominated by headlines about the coronavirus resurgence, that didn’t seem to keep investors and traders from piling back into equities as the trading week started.

Stocks got a big shot in the arm from Boeing (BA). The Dow Jones Industrial Average ($DJI) component rose more than 14% on news that Federal Aviation Administration recertification flight tests on the 737 Max began Monday. 

While the news was a big deal for BA, the aviation industry in general still has a long row to hoe as airlines are carrying only a fraction of traffic due to the coronavirus (see more below).

But on Monday, investors seemed to shrug off a recently gloomy outlook on companies whose fates are tied to the reopening economy. Hotel, cruise line, and casino stocks also gained, along with airline stocks including Southwest Airlines (LUV), American Airlines (AAL) and United Airlines (UAL)—the airlines with the largest fleets of 737 Max jets.

Those airlines and BA helped propel the S&P 500 Industrials Sector (IXM) to the position of the day’s biggest gainer. All the other sectors also finished in the green, indicating the return to risk-on sentiment was broad based, despite a domestic resurgence in coronavirus cases. 

Green Shoots In Europe, China Help Oil, Stocks

Overseas data also seemed to help the mood on Wall Street. European Commission numbers indicated that eurozone economic sentiment improved in June while data out of China showed industrial-firm profit rose in May, marking its first uptick in six months. 

It seems that we’ll have to file the numbers in the green-shoots category. Even if the coronavirus were magically evaporated right now, the global economy would take some time to recover. But as it stands, hotspots of reemergence are popping up around the globe, and it remains to be seen exactly how that will affect the world’s economy.

Still, Monday’s optimism helped propel oil prices higher as the demand outlook brightened. When black gold rises along with equities, that often means that investors have a larger appetite for riskier assets. In Monday’s case, that appetite appears to have been helped by increased optimism about the global economic recovery.

CHART OF THE DAY: STILL HOLDING ON TO SUPPORT. The S&P 500 Index(SPX—candlestick) closed above its 200-day moving average (blue line) and remains between the 61.8% and 78.6% Fibonacci retracement levels. This indicates SPX could still move within the trading range it’s been in since June 11. These are key support and resistance levels to keep an eye since the market could move out of its trading range in either direction. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

The 737 Max and the Pre-Flight Checklist:  Yesterday’s FAA recertification flight for Boeing’s (BA) 737 Max was cheered by investors, who sent the stock soaring 14%. That’s a good first step toward regaining its share price—though it’s still off the all time high by some 60%. It’s also a first step toward returning the Max to its former place in U.S. fleets. First off, yesterday’s flight was the first of three such flights. Then the data needs to be analyzed by the FAA. And then there’s the demand issue: According to the trade group Airlines for America, at its worst point last month, more than 3,000 U.S. aircraft were in storage, and are slowly coming back online. But according to the Transportation Safety Administration, its June security count—a good proxy for the number of fliers going through its checkpoints—has been running at less than 20% of last year’s total. 

And finally, there’s the psychological issue. Once the 737 Max does get clearance to return to the sky, how will airline passengers feel? While the plane will have been under such intense  scrutiny and is thus likely to be safer than ever, who will want to be the Guinea pigs? Will passengers demand to know which aircraft they’re being booked on and will they have a chance to opt out if booked on a Max? Again, it’s a great first step for Boeing. Will it be a giant leap for aviation in general?    

3000 Holds For Now: Monday’s market saw an important technical level hold. After closing just above the psychologically important 3000 mark last week, the SPX briefly dipped ever so slightly below that level on Monday morning before the day’s rally really kicked into gear. The benchmark index hasn’t closed below 3000 in more than a month, and holding that level could be a key factor in determining the shape of the market’s recovery.

The Fear Trade is Still There: While Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) eased Monday, as you might expect on a risk-on day, it was interesting to note how Treasuries and gold acted. Yields on U.S. government debt fell slightly, indicating there was some demand for the relative safety of Treasuries. And gold prices rose a little as well. Those developments, in the face of such a strong gain in equities, seem to indicate that the market still has quite a bit of uncertainty about the economic recovery. So while it was a good sign that the 3000 mark held in the SPX and participants sent equities on a nice bounce, it also seems that investors and traders are keeping one foot in safe-haven investments.  

Good Trading,
JJ
@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Micron beats on top, bottom lines, gives encouraging guidance
  • Extra volatility possible as today marks the end of month, quarter, half

  • FedEx reports earnings after the close

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