Tariff Talks Appear to Take Center Stage Again; Markets Drop in Early Going

Markets look poised to tumble at the open, reportedly prompted by National Economic Council Director Gary Cohn's departure.

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(Wednesday, Market Open) The markets seem to be poised to tumble at the open, following a post-market deep dive yesterday that appeared to be prompted by reports that National Economic Council Director Gary Cohn was resigning from the White House.

In the early going, the Dow Jones Industrials ($DJI) was pointing to a triple-digit decline. Late yesterday, futures dropped more than 300 points after a rocky session that ended slightly higher. The S&P 500 (SPX), which settled higher by about a quarter-percentage point yesterday, had fallen about 1.1% in after-market trading and was lower ahead of the open. Ditto on the Nasdaq Composite (COMP).

Cohn, a former executive from Goldman Sachs, has long had the trust of Wall Street, and some analysts said his departure could be troubling, depending on who might replace him. He has been a vocal opponent of President Trump’s efforts to slap 25% tariffs on steel and 10% tariffs on aluminum, according to published reports.

It has been widely reported that Cohn’s resignation was tied to Trump’s insistence on tariffs, many analysts said today. Other Republican leaders Tuesday also urged caution and called for a “more surgical approach” to setting tariffs to help avert a potentially dangerous trade war, according to US News.

Commerce Secretary Wilbur Ross said on CNBC this morning that reports of a trade war were overblown. “We are not looking for a trade war,” he said. “We are going to have sensible relations with our trade allies.”

Whether Trump will heed the calls or back off somewhat from his tough tariff talk is still uncertain. As noted many times, the markets don’t like uncertainty—and Cohn’s resignation could be adding an element of ambiguity to the tariff tantrum that appears to be ruling the markets this week (see chart). Investors might want to remember not to get too embroiled in politics and pay attention to what they can control. 

So-called haven assets, those that investors turn to when volatility is prevalent, rose. Prices on bonds, which move in the opposite direction of yields, climbed. Yields on 10-year Treasury notes were off to about 2.85% while the two-year notes were standing at about 2.23% in the early going.

Elsewhere, the ADP private payrolls report out this morning came in higher than expectations. February payrolls climbed by 235,000, according to the report, handily beating Wall Street expectations.That’s the fifth straight month of payroll gains, which the report said were broad based in February.

In earnings news, shares of Dollar Tree (DLTR) fell as much as 10% in pre-market trading. The discounter missed Wall Street’s expectations on Q4 profit, revenue and same-store sales expectations. Ross Stores (ROST) outpaced Wall Street’s forecasts but offered cautious guidance late yesterday. Shares fell in the pre-market session. Urban Outfitters (URBN) shares also were off in post-session trading yesterday. The apparel-wear retailer reported that earnings took a hit from the new tax law and repatriation costs as well as a write-down of deferred taxes, according to reports. Abercrombie & Fitch (ANF) shares climbed in pre-market trading. Another apparel-wear retailer, ANF reported results that were better than projections.

FIGURE 1: HOW ROCKY WAS IT?

Some analysts are referring to the gyrations of the markets in recent sessions as a tariff tantrum. Here’s one example above: Yesterday’s wide swings on the Dow, which finally settled the session marginally higher. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Dove to Hawk? Federal Reserve Gov. Lael Brainard said Tuesday she has more confidence that inflation might actually make the Fed’s 2% target this year, according to published reports. In her first public comments on policy since October, Brainard said in a speech in New York that “headwinds are shifting to tailwinds,” according to Reuters. The report suggested Brainard, who urged caution in tightening monetary policy last year, might be changing her mind as the economy continues to improve.

“Mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations,” Reuters quoted her as saying. “With greater confidence in achieving the inflation target, continued gradual increases in the federal funds rate are likely to be appropriate.” She did not say how many rate increases might be appropriate.

Retail on the Rise? Some 76% of the nation’s top retailers and restaurants have turned in their Q4 sales and the results have been relatively strong, according to Thomson Reuters’ proprietary research. “The bulk of retailers continue to beat earnings and (same-store sales) expectations,” the report said. “Overall, Q4 2017 holiday spending was healthy as consumers felt better about their economic situation, and, therefore, extending themselves.”

Of the 169 companies in the retail/restaurant index that have reported earnings to date for Q4, 71% have reported earnings above Wall Street’s expectations, 8% reported earnings in line with analyst projections and 21% reported earnings below analyst forecasts, the report said. The 4Q 2017 blended revenue growth estimate stands now at a 7.8% gain.

Hostile Drones: Legislation apparently is in the works to allow federal law enforcement and homeland security to “disrupt, take over or even destroy suspected hostile drones in U.S. airspace,” according to the Wall Street Journal.

The Pentagon and the Energy Department now have those explicit powers, according to the WSJ, but the Federal Bureau of Investigation, Homeland Security and a handful of other civil agencies could get similar rights. “We need to reduce risks…to public safety” from the hostile use of drones, Michael Kratsios, the White House’s deputy technology adviser, said at a conference, according to WSJ.

Good Trading,

JJ

@TDAJJKinahan

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FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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