September Blues: US-China Trade Disputes Appear to Weigh on Wall Street

After a bit of a firmer start to the week, US stock futures this morning are suggesting a sustained bounce isn’t in order to start off Tuesday trading.

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Key Takeaways

  • President Trump has threatened a further $267 billion in tariffs on Chinese goods

  • China reportedly plans to ask the WTO for permission to impose sanctions on the US

  • Hong Kong’s benchmark index has entered a bear market

(Tuesday Market Open) September is living up to its reputation as not the greatest month for stocks. After a string of losses last week, U.S. equities had a bit of a firmer start to the week, but based on stock futures this morning it doesn’t look like a sustained bounce is in order — at least not to start off Tuesday’s trading. 

President Trump’s threat of a further $267 billion in tariffs on Chinese goods, in addition to the potential $200 billion worth of duties the market has been fretting about for some time, appears to be weighing on investors’ minds.

In other news on the U.S.-China trade front, Reuters reported that China plans to ask the World Trade Organization for the go-ahead to impose sanctions on the United States in a dispute over U.S. dumping duties that has simmered since 2013.

The downbeat tone to U.S. equity futures came after European and Asian indices were mostly lower. Hong Kong’s Hang Seng Index has entered a bear market, as defined by a 20% pull back from its closing high in January.

Tech, AAPL and China Tariffs

The market started off the week on a slightly better foot, but Monday wasn’t a spectacular day. U.S. stocks were mixed, with the S&P 500 (SPX) and Nasdaq (COMP) snapping losing streaks but still gaining only a bit. Meanwhile the Dow Jones Industrial Average ($DJI) ended slightly lower.

Looking at the S&P 500 sectors, nothing in particular stood out head and shoulders above all the others. However, investors watching the tech sector after last week’s stumble may have been encouraged by its positive performance Monday.  The sector is widely held among investors, and some tech companies have huge market capitalizations. Those factors can often put tech shares in the driver’s seat when it comes to overall market moves.

Despite the sector’s positive performance as a whole, Apple (AAPL) shares closed more than 1.3% lower after President Trump in a weekend tweet said the company’s prices may increase because of potential tariffs and the solution would be to make its products domestically instead of in China. That came after Apple said Trump’s proposed $200 billion in tariffs on Chinese goods would hit a wide range of its products.

In premarket trading, AAPL shares were up slightly, looking to break a four-day losing streak ahead of what is likely to be a closely watched event the company is holding tomorrow. Its September events in the past have often featured iPhone news. 

Volatility Edging Higher Again

As an apparent sign that some of the worry from last week was abating Monday, the market’s main fear gauge, the Cboe Volatility Index (VIX) fell more than 4.8% to a bit above 14. 

But don’t be surprised at market choppiness going forward as investors continue to digest geopolitical issues and read the tea leaves on Federal Reserve interest rate expectations even as the U.S. market and economy seem to be chugging along. In fact, as stocks fell in early trading Tuesday, the VIX had climbed back to the mid-14s.

FIGURE 1: SPX - AFTER RECOVERING LOST GROUND, NOW WHAT? It took 6 months for the S&P 500 Index (SPX) to recover the ground it lost during the meltdown in Jan-Feb. Chart source: Thethinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Targeting 3000: After the correction that lopped 10.2% off the S&P 500 from Jan. 26 through Feb. 8, the index officially got its mojo back on Aug. 24, when its close at 2874.69 meant it had recovered all of that lost ground (see chart above). If history is a guide, albeit not a guarantee, a potential post-correction rally could take the index within spitting distance of 3000 by the end of the year, according to investment research firm CFRA. The index has risen a median 7.3% over a four-month period after recovering all it lost in a prior correction. “Reasons to remain optimistic through year-end include a still-strong economy, rising earnings and a possible easing of geopolitical tensions,” the research firm said.

CPI, PPI and Inflation Antennae: Key inflation data are on tap for this week in the form of the August Producer Price Index (PPI) tomorrow and Consumer Price Index (CPI)Thursday. The market’s inflation antennae appear to be twitching after last week’s employment report showed solid jobs growth and wage growth that was the strongest year-over-year number since 2009. While rising wages can be indicative of a stronger economy, they also factor into inflation expectations and predictions as to what the Fed might do to try to rein in inflation. Because PPI and CPI can be affected by rising labor costs, it may be of particular interest to market watchers whether the data this week show higher-than-expected prices paid by producers and consumers. According to a consensus of economists provided by Briefing.com, expectations are for figures for both readings to rise 0.2%. Higher-than-expected readings could make those inflation antennae wiggle a little faster.

August IMX: Investor Sentiment Ticked Higher: Investors appeared optimistic in August by showing greater risk appetite and increasing their exposure to equity markets, according to TD Ameritrade’sInvestor Movement Index (IMX).The IMXSM, which measures what TD Ameritrade clients are actually doing and their exposure level to markets, rose to its highest level since February. Top buys included technology names such as Facebook (FB), Amazon (AMZN) and Advanced Micro Devices (AMD). Investors also showed interest in yield by buying traditional dividend-payers such as Ford Motor Co. (F) and AT&T (T), potentially indicating doubt that the 10-year Treasury yield will be able to meaningfully push above 3% and stay there anytime soon. Although the IMX was up for the fourth straight month, it doesn’t appear that things are getting frothy given the measured pace at which these investors have been increasing their market exposure.

Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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