Huawei Extension, Alphabet Decision To Work With Company, Appear To Support Stocks

The Huawei soap opera took another plot twist overnight, and this one looked positive. Stocks ricocheted higher following Monday’s poor showing, but how the episode ultimately turns out remains a mystery.

Now the Commerce Department says Huawei will be allowed to access U.S. technology and buy equipment from U.S. companies for up to 90 days, media outlets reported. This is a move that looks like it’s designed to ease the transition for U.S. firms, but it’s definitely not an end to the much larger conflict. In fact, Chinese President Xi’s visit yesterday to a rare earth mining base sent a hint that China might be thinking about firing new shots in the long-running trade battle. 

Meanwhile, Nike Inc NKE and Under Armour Inc UAA, along with some other companies, wrote the White House to warn about the impact of tariffs on their businesses. Many clothing companies have operations overseas, and China is a big area for them, so it wouldn’t be too surprising to see more of this in coming days and weeks.

Headline news continues to rule the day. Technology stocks took it on the chin Monday, but came back in pre-market trading Tuesday on the new Huawei development. Stocks are swinging like a pendulum based on the latest tweets or Chinese government announcements, and long-term investors may want to consider stepping back a little and not agonizing over every rise and fall.

At the same time, a late-season surge of earnings reports this morning might loosen the China trade stranglehold over the market. Home Depot Inc HD had mixed results, with earnings beating analyst estimates but same-store sales falling due in part to inclement weather, the company said. Shares eased a bit in pre-market trading. Maybe keep in mind that HD had weather troubles in the same quarter a year ago but ultimately bounced back.

The news from Kohl’s Corporation KSS didn’t get a mixed review from investors. It was two thumbs down for the retailer as shares dived 10% after KSS missed on earnings and chopped its guidance. We’ll have to see if this weakness carries over to other big stores reporting this week like Nordstrom, Inc. JWN and Target Corporation TGT. Shares of both were down in pre-market trading, perhaps in sympathy with KSS.

After this morning’s full basket of retail earnings, more are due this afternoon as JWN and Urban Outfitters Inc URBN present their numbers. Also, housing firm Toll Brothers Inc TOL, which reports after today’s close, could provide insight into whether recent lower mortgage rates might be setting off any enthusiasm among new home buyers. TGT holds its earnings call tomorrow morning. 

In other corporate news, Tesla Inc TSLA shares retreated in the early going Tuesday as Morgan Stanley MS put out a report that in a worst-case scenario, the stock could drop to $10. Morgan Stanley’s concerns are partly with TSLA’s business in China, as well as its debt load, CNBC reported.

Bleak Start to Week

The Huawei fallout has created a wild card, and the market isn’t loving it. That was evident Monday as stocks began the week on a bleak note.

Tensions with China—already sizzling from the squabble over trade deal disagreements—flared up more after President Trump signed an executive order saying U.S. firms can’t use telecom equipment from companies that pose a national security risk, a move broadly seen as targeting Huawei. And the Commerce Department added Huawei to a list requiring the company to get government approval to acquire components and technology from U.S. firms.

It’s unclear how the new 90-day extension might play out, but yesterday Google parent Alphabet Inc GOOG announced that it will continue working with Huawei after earlier saying it would suspend business. There’s still widespread concern about the possibility of semiconductor firms cutting guidance, considering all the China exposure they have. Lumentum Holdings Inc LITE has already cut its fiscal Q4 guidance to reflect lost business from Huawei. 

In today’s tech-heavy world, trade is such a tangled web, making it complicated to punish another trade partner without hurting your own economy. The impact of Huawei on U.S. firms shows how intermingled their businesses are with the Chinese company. The picture just isn’t black and white the way it might be if a product and company being targeted were in the automobile or agricultural business. The semiconductor sector fell dramatically on Monday, down 4%. Still, the Nasdaq Composite (COMP), which includes many Info Tech shares, is still up more than 16% year-to-date.

It doesn’t help that this trade dispute is so public. Investors might not be used to seeing trade negotiations happen right before their eyes. With everything so out in the open, and because nobody has any real insight into the final results of negotiations, the market seems to be moving back and forth on every public statement.

Back Home

Turning away from China momentarily, the big economic report today is U.S. existing home sales for April, due soon after the opening bell. Analysts in a Briefing.com consensus looked for sales of 5.35 million on a seasonally-adjusted basis, up slightly from 5.21 million the prior month. Sales in March were down pretty sharply as higher prices appeared to clip the market’s wings. We’ll see if that changed in April.

Looking ahead to Wednesday, the Federal Open Market Committee (FOMC) minutes from the May meeting loom large. This could give investors a behind-the-scenes look at debate earlier this month, when the Fed decided to leave rates unchanged. The meeting ended with Fed Chair Jerome Powell saying he felt rates were at the right level, disappointing some market participants who’d been hoping for at least some sign that Powell might be ready to chop rates in June. At this point, CME futures build in less than a 7% chance of a June rate cut. 

Though the June meeting is nearly a month away and a lot could potentially happen between now and then, the low odds now suggest pretty good chances of rates staying unchanged.

One thing that seemed interesting Monday was seeing 10-year Treasury yields climb slightly despite the stock market taking a dip. The benchmark yield rose to 2.41%, still pretty low but above its lows from last week. This might have helped give Financial shares a bit of a lift Monday, as they were one of the few sectors to rise. Utilities also rose, however, another sign of the caution many participants appear to be taking at the moment.
 
Figure 1: DIRTY SOX: Though both the Semiconductor Index (candlestick) and the Nasdaq Comp (purple line) are both down over the last month, the Philadelphia Semiconductor Index (SOX) is doing much worse, and had another bad day Monday as fallout over U.S./China trade tensions continued. Data Sources: Philadelphia Stock Exchange, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Playing Hopscotch: Just like that, the S&P 500 Index (SPX) is back below a key moving average. Friday’s weakness and the early action this week took the SPX under its 50-day moving average of 2870, an area it had breached last week before plowing back briefly above it. This week, traders looking at the technical side of things might have their eyes on some possible support points lower down, including the psychological 2800 mark, as well as an interesting area between 2775 and 2785. The 200-day moving average is in that range at 2776, while the year-to-date average is there too at 2784. If things get worse this week, those are possible levels where buying support could potentially show up, but if it doesn’t, that might be another negative sign. However, the SPX has been playing hop scotch with the 50-day average most of this month, so we’ll have to wait and see if it can test it again.

Retaliatory Rumbles?: One concern some analysts have about the trade situation is a possible devaluation of the Chinese currency. By devaluing, China could get an export advantage and potentially retaliate against U.S. actions. The last time China devalued was in late 2015, and that turned out to be a tough few months for markets around the world. This isn't to say it’s going to happen again, but it’s something to consider keeping in mind. So far this month, the yuan is down 3% vs. the dollar, trading at 6.91 to the dollar by late Monday. That’s compared to 6.73 per dollar at the end of April, and the psychological 7 per dollar level isn’t far away. 

No Spike in VIX Yet: With the trade situation continuing to spiral, volatility moved higher Monday. The VIX crossed above 16 after falling to near 15 late last week. Still, it could be significant that we didn’t see VIX move even higher. Generally, the feeling is that a move back above 20 might signal greater levels of worry around trade. A lot of people now are looking ahead to June and the meeting between Trump and Chinese President Xi, so that’s why there might be some hope of things getting better. Generally, however, volatility is likely to persist for a while, and that means anyone trading the market should consider taking extra care and perhaps not going “all in” or “all out” at once.

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