After Gains, Trade Commentary Out of China Pressures Market Sentiment

After both the U.S. and China made conciliatory comments earlier in the week, it seems that the rhetoric is now going the other way.

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6 min read

Key Takeaways

  • Stock indices pointing lower in early trade
  • Corn prices rise as wet weather delays planting
  • Nvidia, Applied Materials beat earnings expectations

(Friday Market Open) The trade tension pendulum has swung the other way. After both the U.S. and China made conciliatory comments earlier in the week, it seems that the rhetoric is now going the other way.

According to a state-run media agency, Chinese Commerce Ministry spokesman Gao Feng accused the United States of “bullying behavior.” The commentary comes after the United States raised tariffs on $200 billion of Chinese goods, and China, in retaliation, announced increased tariffs on U.S. goods that are scheduled to start in June.

But it’s notable that the losses Wall Street is facing early Friday, based on equity index futures, aren’t as large as losses faced in recent days. It seems that the market’s repricing may have come to a new equilibrium that will allow smaller ups and downs based on headlines even as volatility continues. But it’s still early, and this week’s action should serve as a reminder that a selloff could be magnified—or erased—by week’s end.   

The market has taken solace in comments that the world’s two largest economies are still talking to each other. Treasury Secretary Steven Mnuchin told U.S. lawmakers that he expects to continue trade talks in Beijing in the near future. However, China has said it doesn’t know about those plans.

In earnings news this morning, a couple technology firms were in the spotlight. Chipmaker Nvidia (NVDA) reported fiscal Q1 earnings that beat third party estimates, however it retracted its full-year guidance, which had anticipated stronger sales in the second half of the year. NVDA was aiming down in premarket trade Friday. NVDA’s revenue was down 31% year over year, with its gaming segment down 39%. Still its gaming segment sales were stronger than expected, up 11% over the previous quarter. Its chips, or Graphics Processing Units (GPUs), have been in lower demand by cryptocurrency miners, but they are seeing higher demand from the laptop market.

And Applied Materials (AMAT) shares traded higher in the early hours on the heels of its fiscal Q2 earnings and revenue beats and as it raised guidance for Q3. CEO Gary Dickerson said in a statement that he expects “powerful new demand drivers for semiconductors” in AMAT’s market.

In commodities news, corn prices have been on the rise as wet weather has delayed planting. At some point, it becomes too late to plant corn, and the thinking is that farmers may switch to soybeans. That has helped to depress soybean prices, which were already under pressure due to the ongoing trade wrangling with China. We’ll have to wait and see whether the planting switch ends up happening and perhaps pressuring soybean prices more. 

Cisco, Walmart Help Lift Sentiment

Although we’re at the tail end of corporate reporting season, Thursday’s trading session showed that earnings still have the power to drive the market as solid results from two Dow components representing key parts of the economy helped boost stocks. 

Cisco’s (CSCO) shares rallied more than 6% after the company beat expectations on its top and bottom lines and issued better-than-forecast revenue guidance. The company sees “very minimal impact” from tariffs as it has been working to adjust its supply chain and only about 3% of the company’s revenue comes from the Asian nation. 

CSCO often can be a leading indicator of sorts for the global economy as it tends to have its finger on the pulse of what’s going on in the world of commerce. If the company can successfully navigate the tariff troubles, maybe that is an indicator others can, too. 

Meanwhile, Walmart (WMT), a benchmark Consumer Staples company, reported earnings that topped analyst expectations as U.S. same-store sales also beat forecasts, sending shares up more than 1.4%. The results form a bright spot for the U.S. consumer a day after data showed U.S. retail sales were lower than expected. 

WMT also told Reuters that rising tariffs will make goods more expensive for shoppers, but the company says it’s working on ways to mitigate the price rises. That could be an indicator that other merchants will end up eating some of the tariff costs rather than passing all of them on to consumers. However, WMT is probably in a special position, given its size and ability to negotiate purchasing deals, that smaller companies may not enjoy.

Boeing (BA) also helped move the market higher, rising more than 2.3% as it said it has finished a software update for its 737 Max. The news shows the aircraft manufacturer is on the way to potentially getting the fleet of those planes flying again after the plane’s anti-stall system was implicated in two deadly crashes.

Data Boosts Yields, Banks

On the data front, housing starts rose 5.7% in April as construction on new homes hit an annual rate of 1.24 million, according to the latest data from the U.S. Commerce Department. That’s more than the 1.21 million annual rate economists expected. 

And initial claims for unemployment benefits came in softer than expected, a good indication for the labor market. Initial claims for the week ended May 11 fell 16,000 to 212,000. A Briefing.com consensus estimate had expected claims to come in at 222,000.

The combination of strong data and corporate earnings seemed to elevate risk tolerance, and as investors bought stocks they sold out of U.S. government debt, pushing yields higher. That in turn helped the Financials sector, which rose 1.1%. 

FIGURE 1: FINANCIALS CATCH A BID. The Financials sector (IXM) gained ground Thursday amid a broad stock market rally, and along with an uptick in the 10-year Treasury yield. Higher rates on the back end of the yield curve can help banks' net interest margin—the difference between what they earn on loans versus what they pay on deposits. 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.  

Stocks Above Support Levels: Despite recent selling, the fact that indices have held technical levels may indicate that overall sentiment remains bullish. As of yesterday’s close, the S&P 500 (SPX) was above a zone of support from 2775-2836; the Nasdaq 100 (NDX) was above 7252-7381, and the Russell 2000 (RUT) was above 1494-1520. According to i10 Research, the indices are in a position to move upward in synch, and i10 expects a relief rally to follow recent selling, investment research firm CFRA said in a note. “Should these levels continue to hold, expectations are that the market does not believe that the trade discord will be protracted or widened, nor lead to a worldwide economic slowdown or, worse yet, a global recession,” CFRA said. “Even though we forecast a slight softening of U.S. and global economic growth over the next two years, we do not foresee recession, which we think would allow equity prices to regain their upward trajectory.”

Fed Targets 2% Inflation... Minneapolis Fed President Neel Kashkari said Thursday that the Fed should allow inflation to creep above 2%. “Markets have watched the FOMC treat our inflation target as a ceiling, never to be crossed,” Kashkari said.“For our current framework to be effective and credible, we must walk the walk and actually allow inflation to climb modestly above 2% in order to demonstrate that we are serious about symmetry.”

...but From Where? But that may be easier said than done in the current environment of muted inflation. While oil prices have been supported recently by tensions in the Middle East, in general they face pressure if the global economy slows meaningfully because of the international trade situation. U.S. production could also be a headwind. And despite a tight labor market, wages haven’t contributed to significantly higher inflation. While consumer inflation could come from tariffs, that could evaporate quickly if the U.S. and China reach a deal. 

Good Trading,

JJ 

@TDAJJKinahan 

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Economic calendar for week of May 13. Source: Briefing.com
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Key Takeaways

  • Stock indices pointing lower in early trade
  • Corn prices rise as wet weather delays planting
  • Nvidia, Applied Materials beat earnings expectations

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