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Defensive Measures: Investors Flock To “Safe Havens” As North Korea Tension Flares

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August 9, 2017

(Wednesday Market Open) Geopolitics splashed cold water on the markets as tensions grew between North Korea and the United States. The nine-day streak of record Dow Jones Industrial Average ($DJI) closes is over, and there’s uncertainty and caution as investors nervously eye the next foreign policy moves.

Setting the stage for the U.S. trading day, global markets fell sharply. Concurrently, safe-haven assets like gold and bonds rallied. The VIX, which measures volatility, jumped 9% to nearly a two-month high well above 12, and the yen rose vs. the dollar, helping give crude oil a slight boost. Every S&P 500 sector finished with losses Tuesday. Only utilities, a traditional “safe haven” area, found buyers.

Despite all this, there’s no reason to press the panic button. Remember that earlier this year, markets had a similar response to North Korea/U.S. tensions, which they quickly got over. For now, the North Korea situation bears watching as there’s lots of tough talk, but we’ll see if it escalates. Let’s also keep in mind that even with the S&P 500 (SPX) futures down a few points heading into Wednesday’s session, it remains near all-time highs. The market’s lower action yesterday and in futures trading today is a blip.

If we weren’t talking about foreign policy, we’d probably be focused on retail and media earnings, so let’s check in.

Walt Disney’s (DIS) earnings late Tuesday looked a bit disappointing, with revenue missing Wall Street analysts’ expectations and the stock falling in post-market trading. The interesting thing is the announcement that DIS is taking all of its movies off of Netflix (NFLX) to start its own streaming service.

Elsewhere, Priceline (PCLN) beat on earnings, but its guidance was low and the stock got hammered in pre-market trading.

Going into the heart of retail earnings, the consumer discretionary sector got a big boost Tuesday from Michael Kors (KORS) and Ralph Lauren (RL). Both of those luxury brands issued positive earnings surprises, implying that consumers are out in force shopping for high-end products. However, Fossil Group (FOSL), another luxury retailer, tumbled early Wednesday after missing analysts’ projections on revenue and earnings per share.

The retail hurricane really blows into town Thursday with reports from Kohl’s (KSS), Macy’s (M), and Nordstrom (JWN). That’s when we might get a better sense of how these brick-and-mortar companies are competing as the world’s focus keeps moving toward online sales.

Remember, these retail stores aren’t a single company, and it’s important not to think of them that way. Each has its individual challenges and potential triumphs, and better-than-expected revenue at one could conceivably hurt results at one of the others. Macy’s appears to be front and center in the brick-and-mortar vs. online fight, while J.C. Penney (JCP) — which reports Friday — has struggled, with falling sales in Q1. Investors might want to keep a close eye on revenue at all of the retailers. Real estate expenses could cause a retailer to miss on earnings, but revenue says more about shoppers coming through the doors.

From a data standpoint, watch Wednesday for the U.S. government’s weekly oil stockpiles report. Supplies keep falling, but we’re approaching the end of U.S. “driving season” and oil inventories remain on the higher end of the historic scale for this time of year.

Dow Jones Industrial Average

FIGURE 1: NICE WHILE IT LASTED.

The Dow Jones Industrial Average’s (DJIA) nine-day streak of record-high closes is over, and the VIX (purple line) popped up late Tuesday after tensions flared between the U.S. and North Korea. Data sources: Dow Jones & Co.; CBOE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Dollar Gets Some Love: The downtrodden U.S. dollar showed some life early this week, though it remains about 8% lower year to date. A huge gain in job openings in the monthly Job Openings and Labor Turnover Survey (JOLTS) appeared to give the dollar new legs, as the report helped confirm investor impressions of a solid U.S. economy.  The U.S. Dollar Index surged above 93.50 immediately after the data came out Tuesday morning. One thing dollar watchers might want to keep an eye on in coming months is whether Congress puts any sort of repatriation into its tax reform plan, which would allow U.S. companies to bring back overseas profits at a lower tax rate. Back in 2004, the dollar surged 13% when repatriation took effect, Briefing.com noted. Technical support for the dollar index looks to be around 92.80, and the euro’s run toward $1.20 has slowed, at least for the moment.

Stay Tuned For Wholesale Inventories: After a long period of decline, wholesale inventories started to recover in recent months. Today’s report for June could shed light on whether that trend continued. Wall Street analysts look for a 0.6% rise in the headline number, following May’s 0.4% gain, Briefing.com said. Durable inventories led the way in May with a 0.6% gain, so check for more strength in that category, which helps track demand for bigger-ticket items like machinery. Also, keep an eye on the inventory-to-sales ratio, which at 1.29 in May was down from 1.34 a year earlier. Generally, the lower the ratio, the more it might indicate future growth in demand.

Expectations Ahead of PPI Thursday: The market doesn’t tend to focus too much on wholesale inventories, but Thursday morning brings the July Producer Price Index (PPI). That’s data near and dear to investors’ hearts, especially in these strange times when lower and lower unemployment seems to have little to no effect on inflation and the Fed struggles to explain why. Looking ahead to Thursday’s PPI, analysts’ consensus is for a very modest 0.2% gain, with a 0.2% gain in core PPI as well, Briefing.com said. While that would be an improvement from 0.1% for both categories the previous month, it still wouldn’t suggest any major move in prices liable to get the Fed ready to take out its rate hike pen again. Chances for another rate increase this year have picked up a little this week after Friday’s strong payrolls report, and recently were just above 50%, according to CME Group futures. That’s up from around 40% a week ago.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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