Trade Winds Keep Blowing, Potentially Putting A Barrier On Rally Chances

Iced or hot? Foam or no-foam? Anyone who’s ever had trouble making up their minds can probably empathize with the markets right now.

On the one hand, some investors look ready to embrace more risk, but at the same time many remain a bit cautious amid the same old trade-related concerns. That caution appeared to rear its head again Friday on renewed worries about the chance of additional U.S. tariffs against China.

The overall atmosphere is still headline-driven and can vary by the day, so investors probably shouldn’t make trades based on the latest trade winds. The threat of new tariffs still sits like a troll beneath the market’s bridge. At the same time, some of the clouds seemed to lift a little last week and might have injected some power into stocks of multinational companies that depend on export markets. This push-pull kind of action might leak into the days ahead as data and earnings are a bit scarce.

Rising Yields Might Hint At Risk Embrace

Before trade fears rekindled, the 10-year Treasury note yield flirted again with 3 percent on Friday. It was the first real attempt at that psychological level in more than a month, but whether it can hold on is the real question. Several moves above 3 percent earlier this year fizzled out, and the yield has been stuck in a tight range between 2.8 and 3 percent for a few months. Any longer-term move above 3 percent—say, one that lasts more than a day or two—might indicate that some investors are starting to respond to strong U.S. economic growth and rising wages by taking some money out of cautionary investments like Treasuries.

The rising yields also probably reflect expectations for the Fed to take further action on rates when it meets later this month. Chances of a 25-basis point hike are baked in, with the futures market pegging it at 97 percent. Investors seem a little less sure about the Fed’s next step after that, but only a little. There’s now a better than 80 percent chance of a fourth rate hike by year-end, CME futures indicate.

Beaten Down and Bouncing Back

From a stock standpoint, the “risk-on” sentiment could be evident in shares of stocks like Netflix, Inc. NFLX, which got hammered over the summer as investors reacted to disappointing earnings, but now clawed back about 16 percent from its lows a month ago. You can also see the positive feelings in shares of Apple Inc. AAPL, which jumped last week after its new product launch event had many investors feeling more positive about the company’s product position heading into the holidays.

By the middle of last week, the U.S. dollar index was sitting well below its summer highs. However, it climbed back a little by midday Friday as President Trump hinted at the possibility of issuing new tariffs against China. Earlier in the week there had been signs of the administration possibly stepping back from that threat. Again, there’s not a lot of other news out there, so these trade headlines could drive things back and forth a lot in coming days. Also, the U.S. election is starting to get close. There may be more headline risk than usual in the weeks ahead, and long-term investors might want to keep that in mind and not let any short-term developments interfere with their strategies.

Financials Miss Rally Party

Perhaps reflecting those headline fears, the financial sector continued to lag the broader S&P 500 (SPX) over the last month, and even looked sluggish last week as most of the market looked like it might revisit all-time peaks. The financial sector malaise seems even more surprising when you consider the recent rise in interest rates. That said, financials began moving higher Friday as the 10-year approached 3 percent.

While we’re on the subject of rates, the Bank of Japan has a meeting scheduled this week and a decision on policy is expected Wednesday. It looks like the BOJ is likely to keep rates unchanged, while focusing on trade battles that might threaten its export-oriented economy, analysts said. We’ll wait and watch, but the meeting isn’t expected to have a big impact on U.S. stocks or Treasuries.

It’s still a long way from earnings season, but there is a notable earnings report scheduled after Monday’s close when Oracle Corporation ORCL unwraps its results. ORCL’s management has regularly touted the company’s cloud business growth, and have said that it’ll remain a strong growth driver in the future. Cloud now makes up 16 percent of ORCL’s revenues. However, some analysts say it might be harder for investors to track the company’s cloud revenue growth because it’s being folded into a larger unit. Last time out, ORCL beat Wall Street analysts’ estimates for both top- and bottom-lines.

There’s also some data on the way in the week ahead, much of it housing-related. Investors will get a look at August building permits, housing starts, and existing home sales.

FIGURE 1:  Rounding Third: Yet again, benchmark 10-year yields flirted with 3 percent as the old week ended, rising above that level intraday Friday before stepping back a bit amid more tariff fears. The yield hasn’t spent much time above 3 percent since early August, and its rally from last month’s lows could be a sign that investors are getting more confident in the economy. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Apple Eyes China

One interesting note out of Apple’s (AAPL) event last week was what seems to be an effort to appeal to Chinese phone users with features like larger screens and dual-SIM, or “subscriber identity module” support, The Wall Street Journal noted. U.S. tech companies in China, including AAPL, face heavy competition from domestic Chinese firms. For instance, AAPL is now the fifth-best selling phone brand in the country, with just 6 percent of the market. High prices are one possible drag, the newspaper reported, while the recent tariff battle between the U.S. and China also has put AAPL and some other U.S. companies in a delicate position as they seek to grow their brands in that key region. AAPL has had success getting average selling prices up for the iPhone, but the next challenge could be expanding its overseas market share.

Benign Inflation But What About Earnings?

Inflation numbers last week looked pretty benign, with producer prices falling in August and consumer prices rising about as expected but not at levels that would indicate any kind of economic overheating. The question is what this might mean for Q3 earnings. On the one hand, it’s good for companies if their input costs aren’t going up too much (PPI), but if consumer prices (CPI) aren’t rising, that could mean companies aren’t necessarily improving profit margins through price increases.

Another wrinkle in this might be retail sales, which rose just 0.1 percent in August after a 0.7 percent jump in July. Though retail sales are up more than 6 percent year-over-year, and one month never represents a trend, it looks like in August, at least, consumers pocketed their 2.9 percent wage increase from a year earlier rather than going out and spending it. This is a potential trend to monitor as holiday shopping season approaches. Keep in mind, though, that despite the light August number, the government upwardly revised July retail sales, and retail sales are up 0.2 percent or more on a monthly basis in five of the last six months.

Consumer Says

So with a little confusion right now about where consumers might stand, perhaps it’s best to turn to the University of Michigan’s preliminary sentiment report for September. The report, released Friday, showed a headline figure that jumped to 100.8 from 96.2 a month earlier and well above Wall Street analysts’ expectations. It was the second-highest level since 2004, behind only the March 2018 reading. The survey pegged the rise to “more favorable prospects for jobs and incomes,” and also noted that inflation expectations fell. “Consumers anticipated continued growth in the economy that would produce more jobs and an even lower unemployment rate during the year ahead,” the survey’s Chief Economist Richard Curtin said in a press release. “While consumers were somewhat more likely to anticipate that the economic expansion would continue uninterrupted over the next five years, nearly as many expected another downturn sometime in the next five years.” He added that the main economic worry among consumers is the tariff situation.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.