Winning Streak Ends as China Optimism Fizzles, Apple Seems To Leave Sour Taste

A wild week is over with the three-day win streak stopped cold after Friday’s volatile session. Markets swung higher on optimism of trade progress with China, only to slip after those rumors got shot down and investors digested what some analysts saw as a weak outlook from Apple.

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Key Takeaways

  • Market pulls back in wild up-and-down session Friday as volatility continues
  • Apple’s results, guidance help weigh on Nasdaq

  • Mixed signals on China trade help keep market on its toes 

(Friday Market Close) Bears won the day Friday after a tug of war saw early gains erased as investors digested news on Apple (AAPL), international trade and the U.S. economy. 

October payrolls data Friday showed 250,000 jobs created in October, exceeding expectations, and that hourly pay jumped the most in almost a decade.

That’s a strong showing for the economy as a whole, but investors apparently were focused on the inflation implications, seemingly worrying that the Fed might end up tightening rates too much in an effort to keep the economy from overheating. 

The strong data also appeared to help boost Treasury yields, also apparently pressuring stocks. The 10-year yield, which had fallen all the way to 3.07% earlier this week after jumping above 3.25% in October, climbed back to 3.22% by the end of the day Friday. 

Apple (AAPL) results also seemed to pressure stocks. The widely-held company’s shares fell even though AAPL beat third-party consensus estimates for both earnings per share and revenue. Instead, investors seemed to focus on iPhone unit sales that were a bit shy of Wall Street’s estimates and the company’s fiscal Q1 guidance, which was just below the average analyst estimate. 

Some analysts also expressed disappointment with AAPL’s decision to stop reporting unit sales for its products, including iPhones, after this quarter. That could make it harder to see how the company is performing.

The market also had to digest mixed signals on trade. On Thursday, a tweet from President Trump said he’d had a productive conversation with Chinese President Xi. Stocks opened higher this morning after what sounded like encouraging words from Xi on state television. But enthusiasm was tempered after CNBC reported an administration official saying, “there’s a long way to go” to reach a deal.

Friday’s trading session came ahead of what could be a momentous week. Tuesday is Election Day in the United States and investors may want to be tuned in to the results as varying economic policies among the different candidates for congressional seats and state leadership roles could help shape the trajectory of the economy and the publicly traded companies that help make it up. 

The elections have arguably been one factor that has heightened stock market volatility in recent days, as investor uncertainty seems to have risen. After Tuesday, elections will be behind us, but there are other factors that appear likely to keep investors on their toes. They include continued worries about trade between China and the United States as well as concerns over the European economy and higher interest rates.

Stay Tuned for Fed Meeting Starting Next Wednesday

The Federal Reserve begins its monthly rate setting meeting the following day, with a decision scheduled for Thursday. The futures market is showing a high probability—more than 92%—that the Fed will leave rates unchanged at this upcoming session. However, chances of a hike before the end of the year are close to 80%, and the strong jobs report might play into expectations that the Fed could act.

Even though it doesn’t look like there will be a rate hike next week, it could still be worth reading the statement that accompanies the Fed’s decision. Investors may want to parse any language about rising wages, tariffs and any other language that could point to policymakers’ thinking about the health of the economy and its effects on inflation. 

Earnings season also continues next week, with company reports coming from Eli Lilly (LLY), Activision Blizzard (ATVI) and Disney (DIS). The DIS and ATVI could be of particular interest as they offer a peek into discretionary spending on entertainment. 

FIGURE 1 LOOKING IN THE MIRROR: The gold market (/GC - candlestick) has seen breakouts to both the upside and downside this year, but lately it has been drifting toward the middle. The U.S. Dollar Index ($DXY - purple line) has been essentially a mirror image. Data Sources: CME Group, ICE Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Trade Deficit Widens: The ongoing trade dispute between the United States and China has taken center stage with investors in recent months. The tit-for-tat tariffs each has put on the other’s goods and the potential for further duties have created worry that the economic battle between the world’s two largest economies might put a damper on global economic growth. But for all the huffing and puffing, the levies the United States has put on Chinese goods don’t appear to be decreasing the domestic trade deficit with the Asian giant. Data out Friday from the U.S. Commerce Department showed that the nation’s trade deficit with China widened by $3 billion to $37.4 billion in September even as the total deficit jumped to $54 billion. “The key takeaway from the report is the same as last month in that it has yet to confirm the tariff actions are succeeding in cutting the trade deficit with China specifically and in general,” Briefing.com said.

Dr. Copper: While the economy in the United States is chugging along strongly, signs don’t look as rosy overseas. Europe is under the shadow of Brexit negotiations and a budget crisis in Italy, and Chinese stocks have come under pressure recently amid mixed economic data. And of course, there is the aforementioned trade dispute between the United States and China. Amid the worry, especially about China, copper prices have been on the decline. Why is that important? Well, copper is an important industrial metal used to make all sort of goods, from air conditioners to pipes for houses. China is a huge consumer. Copper is so closely linked with the health of the global economy it is often referred to as Dr. Copper for its economist-like ability to forecast global growth or lack thereof. We’ll have to wait and see how accurate its predictive powers are and whether any slowdown in global growth dulls the shine of the U.S. economy.

Gold’s Many Faces: Even as copper’s price has dropped over the past year, so has gold’s. On its face, that may seem surprising given declines in copper can point to slowing global growth and gold is often seen as a safe-haven investment that reacts as a hedge when factors, such as economic data, suggest that stocks may move lower. Gold is often also viewed as an inflation hedge that could keep more of its value as dollar-based purchasing power declines. So you might also expect the precious metal to rise in value. So what’s going on? Consider another of gold’s roles. It’s also considered a dollar hedge and tends to move inversely to the greenback. Looking at a year-to-date chart, gold’s price is basically a reverse image of the dollar index, which tracks the buck against a basket of other major currencies. As the greenback fell earlier in the year, gold rose. But as the buck has come back, the precious metal has fallen. As the buck has remained high in recent months, gold has remained low. To be sure, gold has gotten a bounce recently, arguably helped by a safe-haven bid. But it is still well below where it was earlier in the year. 

Good Trading, 

JJ

@TDAJJKinahan 

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