ECB Announcement, Trade Optimism Help Keep Market Momentum Positive

If the market’s mantra yesterday was “try, try again,” this morning’s might be “wait and see.”

It was looking like a muted opening for U.S. stocks after the European Central Bank said it would stop its bond buying program, a move that had been widely telegraphed in recent months. Although the move to end crisis-era stimulus might be seen as a vote of confidence in the European economy, smooth sailing across the pond may be far from assured.

The planned exit of Britain from the European Union still lacks an agreement while Italy’s budget negotiations with the EU continue to add uncertainty. Meanwhile, France has been struck by civil unrest, with President Emmanuel Macron facing a vote of no-confidence, one day after Britain’s Prime Minister, Theresa May, survived a similar vote over the embattled Brexit negotiations.

In other international news, Asian shares moved higher after a Wednesday session in the United States was fueled by optimism about the prospects for an eventually resolution to the U.S.-China trade war.

Favorable Trade Winds

Consumer discretionary stocks were the best performing of the S&P 500 sectors on Wednesday, arguably a sign that investors had more of a risk-on mentality during Wednesday’s trading. Meanwhile, they sold safe-haven Treasuries, pushing yields higher, and Wall Street’s fear gauge, the Cboe Volatility Index (VIX) continued its decline, though it remains above 20.

The bullish sentiment seemed to flow from developments in the China-U.S. trade dispute that appeared to give some investors more optimism that the world’s two largest economies can eventually reach an agreement in a controversy that has shaken confidence in global economic growth prospects.

Among the news that seems to have affected the market positively, President Trump said he might be willing to intervene in the criminal case of a top Chinese executive arrested last week if it would help reach a trade deal. And a Wall Street Journal report said China is preparing to institute a new program aimed at broadening access for foreign companies.

Financial Sector Leadership?

We’ve talked in this column before about what it might take for the financial sector to don a mantle of market leadership. Although the sector showed some strength on Wednesday, apparently helped by an uptick in Treasury yields, it seems that we may have a ways to go before financial stocks can begin to meaningfully underpin the broader market.

Since banks typically benefit in a rising interest rate environment by charging more interest on loans than they pay on deposits (what’s known as “net interest margin”), a jump in yields can be beneficial. But despite the recent tick higher, the 10-year Treasury yield remains below the key 3% benchmark.

A hike in the Fed funds rate next week—of which the futures market is pointing to about an 80% likelihood—could help the financial sector. But remember: The Fed funds rate is the short end, so a rate hike in and of itself won’t help net interest margin. For financials to be a sector leader over the longer term, it might require the 10-year Treasury yield to stabilize above that psychologically important 3% mark.

Meanwhile, as the technology sector continues to seesaw on the back of tariff news, those who may be hoping for the financial sector to morph into the upward leader the tech sector was earlier this year may have longer to wait.

Figure 1: Fears Subsiding? The VIX, shown here as a candlestick chart from late Wednesday, has been edging lower. That’s perhaps a sign that market participants have grown more confident after recent volatility. News on the China-U.S. trade front seems to have added confidence to the market and help weaken the VIX, Wall Street’s main fear gauge. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

November Shopping Spree? On Friday, investors are scheduled to get the government’s latest reading on retail sales. For November, headline sales are expected to show a gain of 0.2%, according to a Briefing.com consensus. This report could be interesting as it is set to include post-Thanksgiving sales, including those from Black Friday and Cyber Monday, which are important days for retailers. Of course, holiday shopping is still ongoing, so the report won’t give us a full picture of this year’s holiday spending. But it could be interesting to see how the American consumer was doing during a month of ups and downs in the stock market.

The consumer is the driver of the U.S. economy. If retail shoppers are confident enough in their job situation and perception of their future ability to pay off debt, that can result in more sales at the cash register or the keyboard. It could be interesting to get a glimpse into retail spending during a month of heightened uncertainty on Wall Street. Of course, the stock market isn’t the economy, but there is some overlap, and equities typically respond to economic news. So retail sales figures may be worth watching.

Spending Less at the Pump: One thing that can help consumers have more money to spend is lower gasoline prices. And it appears that lower prices at the pump helped hold consumer prices steady last month. Including volatile energy prices, the November consumer price index showed no change, in line with a Briefing.com consensus. According to the government’s report, the motor fuel index dropped 4.2%. That might not surprise many people after crude oil dropped sharply in October and November.

In addition to putting more money in people’s pockets, potentially helping retailers, falling gasoline prices can also help equities in general as the lower inflationary pressure could be viewed as adding dovish sentiment to monetary policy makers at the Fed. “The key takeaway is that consumer inflation trends are not running away from the Federal Reserve’s longer-run target, which should feed into the market’s growing belief that the Federal Reserve has some data-based scope to take it easy after a December rate hike,” according to Briefing.com.