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Fear Exits Stage Left, Putting Focus on Strong Retail Sales, Home Depot Earnings Beat

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August 15, 2017

(Tuesday Market Open) As quickly as it surfaced, the so-called “fear trade” appears to be receding into the murky depths as tensions over North Korea fade.

Gold fell sharply early Tuesday, along with volatility as measured by VIX. The yen is taking a back seat to the dollar, and overseas stock markets rallied. Easing geopolitical concerns appeared to give investors confidence to exit the safe havens they’d flocked to last week.

Another confidence factor might come from July retail sales, which rose 0.6% to top analysts’ estimates for a 0.3% increase. That’s quite a turn-around from the 0.2% decline seen in June, and could be evidence that the solid jobs market has consumers showing up at stores (or clicking online) again after several months of pretty tepid retail sales data. Core retail sales rose 0.5%, also ahead of an expected 0.3%. The core data strips out volatile automobile, energy and food categories.

With North Korea stepping back from the center ring, investors might start focusing on this week’s parade of retail earnings. It began Tuesday with Home Depot (HD), which got things off to a good start. HD beat Wall Street analysts’ expectations for both earnings per share and revenue, and comparable store sales rose 6.3%. Target (TGT) and Wal-Mart (WMT) are next in line tomorrow and Thursday, respectively.

Looking back at Monday, easing geopolitical tensions helped send some of the more cyclical sectors to big gains, especially info tech, financials, and industrials. Nearly every sector posted solid advances, with energy the odd man out as oil prices took a hit. Transport stocks, which tend to be sensitive to the ups and downs of the economy, performed particularly well (see chart below).

Crude oil took a tumble early this week after China reported weaker than expected economic growth (see below). U.S. oil futures closed at their lowest levels since late July below $48 a barrel. Once again, the $50 a barrel mark has proven hard to eclipse. By early Tuesday, oil was down even more, testing the $47 mark as strength in the dollar started to weigh.

Chances for a Fed rate hike by the end of the year climbed back above 40% Monday, according to CME futures. That’s still below recent odds of 50% or higher, and last week’s light inflation data might be to blame.

Speaking of the Fed, New York Fed President William Dudley hinted at a balance sheet trim starting in September and sees another rate hike this year if economic data hold up, Reuters reported Monday. The question no longer seems to be when the Fed plans to begin whittling down its holdings, but exactly by how much and at what pace. The Fed probably wants to find a way to do it gradually partly to assess the market’s reaction, but also to avoid any potential dramatic interest rate impact.

Volatility slid pretty dramatically Monday, with VIX falling to around 12.5 late in the session as North Korean fears eased. By early Tuesday, VIX fell below 11.6.

Transports

FIGURE 1: TRANSPORTS AND PRECIOUS METALS REVERSE FORTUNES.

Since the start of the day Friday —as seen on this one-week chart — the Dow Jones Transportation Average ($DJT) has climbed significantly even as gold and silver (purple line) have eased off their recent highs. This serves as an interesting illustration of how the market has recovered from some of the geopolitical fears that haunted it last week. Data sources: CME Group, Dow Jones & Co. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Hammers and Nails: Demand for new housing rebounded in June, and tomorrow’s housing starts and building permits data before the open could give hints as to whether that spilled over into July. Housing starts rose 8.3% in June to a seasonally adjusted annual rate of 1.215 million. That was well above Wall Street’s consensus. Building permits rose 7.4%. The June data marked a turnaround after three consecutive months of declines in housing starts, demonstrating that perhaps the recent jobs growth and a stronger economy might be translating into demand for expensive new homes. Analysts look for housing starts to have remained solid in July at a seasonally adjusted 1.217 million, according to Briefing.com.

FOMC Watch: A reminder that Wednesday afternoon brings the release of minutes from the July Federal Open Market Committee (FOMC) meeting. Investors might be interested to see if there’s more detail on the Fed’s balance sheet reduction plans, though it’s unlikely the minutes will spell that out in a really granular way. The internal discussion on possible reasons behind continued weak inflation could be interesting, as could Fed officials’ take on economic growth, though at the time of the meeting the government had yet to release its first Q2 gross domestic product (GDP) estimate. While FOMC minutes don’t often move the markets, they can be critical to understanding the Fed’s thinking. After a meeting without an accompanying press conference, like July’s, they might come in especially handy. The minutes are due at 2 p.m. ET Wednesday.

China and Japan Diverge: Economic data from the two Asian giants early this week sent different signals. China’s retail sales and industrial production fell shy of Wall Street analysts’ expectations at 10.8% and 6.4%, respectively. On the other side of the East China Sea, however, Japan’s Q2 gross domestic product grew at an annualized rate of 4%, well above analysts’ estimates for 2.5% growth. Strangely enough, stock markets in China rose Monday while Japan’s Nikkei fell sharply. The Bank of Japan’s next policy meeting takes place Sept. 20-21, so that’s when we’ll learn if officials there have any plans to tighten the country’s loose interest rate policies after keeping them unchanged last month amid weak inflation. With China, the trend to watch besides economic growth is the U.S. trade relationship, as the Trump administration continues to hint at possible trade barriers. The question is how the recent talks between the countries on North Korea might affect those U.S. trade threats. We shall see.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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