In Wake Of SunTrust/BB&T Merger, Financials Weak On Lower Bond Yields

As this week comes to a close, it seems that traders and investors are continuing to focus on global growth worries stemming from trade fears and concerns about the eurozone economy.

The U.S. market appears headed for its third down day in a row after European and Asian shares were mostly lower following a selloff on Wall Street yesterday as investors appeared to fret about the U.S.-China trade war as the deadline for more tariffs approaches.

The world’s two largest economies have been in a protracted trade spat, slapping retaliatory tariffs on billions of dollars of goods and stoking fears among market participants that the trade war will crimp the global economy. There have already been signs of slowing growth in China even as the ups and downs in the negotiating process haven’t resulted in a firm deal to end the trade battle.

Growth Concerns Weigh

Part of the pressure Thursday seemed to come after CNBC reported that President Trump might not meet Chinese President Xi before the March 1 deadline for a trade deal. 

That wasn’t the only negative China development helping play into the market’s troubles Thursday, as Trump’s economic advisor Larry Kudlow told Fox Business News that the two sides have a “pretty sizable” distance to go. 

POLITICO added to the dour drumbeat of China-related news, reporting that Trump is likely to sign an executive order banning Chinese telecom equipment from U.S. wireless networks, which could ratchet up the tension between Washington and Beijing.

But China isn’t the only area of concern when it comes to global economic growth. The European Commission cut its growth outlook for the eurozone this year to 1.3% from 1.9%. And weak German industrial production figures for December underscored the gloomier outlook. Compounding the growth outlook for Europe is uncertainty about Britain’s exit from the European Union and political turmoil in Italy and France.

Risk Switch Flips to Off

The escalation of worry about the U.S.-China trade war and the downbeat European outlook helped to pressure oil prices along with stocks as traders and investors apparently took a risk-off approach Thursday. 

A worry among oil market participants appears to be that a prolonged situation of retaliatory tariffs could dent global economic growth. When that happens, demand for oil products often falls. The decline in crude helped push energy sector stocks lower, with the S&P 500 energy sector the biggest loser on the day Thursday, down over 2%. 

Meanwhile, with the energy sector sliding on oil prices, all of the other SPX sectors were in the red as well, with the exception of utilities and real estate. That looked to be another symptom of the risk-off trading today. Both of those sectors are often thought about as defensive.

With some market participants apparently moving away from riskier trades, it wasn’t that surprising to see Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) rise above the 17 mark. What has been somewhat surprising is how low the VIX has been recently, trading well under the 20 level where it’s spent much of its history.

Figure 1: Greenback in the Green: The U.S. Dollar Index ($DXY), which weighs the buck against a basket of major competitors, notched its sixth up session in a row on Thursday and was on track for a seventh late Thursday evening. Worries about growth in the eurozone and China have helped boost the greenback as a safe-haven investment. Data Source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Banks and Yield: The financial sector started Thursday with a piece of positive news in the form of the announcement by BB&T BBT and SunTrust Banks, Inc. STI of a $66 billion merger. That helped propel the shares of both firms. If completed, the deal would make the combined company the 6th largest U.S. bank. Though BBT is essentially buying SunTrust in the all-stock deal, the banks’ executives are calling it a “merger of equals.” But the news wasn’t able to lift the financial sector as a whole as investors piled into the perceived safety of Treasuries, pushing their yields lower. 

While the BBT/STI deal was a positive for regional banks, big banks such as Wells Fargo & Co WFC, JPMorgan Chase & Co. JPM and Bank of America Corp BAC finished Thursday in the red zone, in large part due to a fall in Treasury yields. The benchmark 10-year yield fell 5 basis points on Thursday to 2.66% and fell further to 2.64% early Friday. The spread between the 2-year and 10-year narrowed a touch, to 17 basis points, on Thursday. Falling yields and a narrowing yield curve can cut into bank profitability, so many investors have been watching the yield curve closely.

Looking Ahead to Data: Highlights on the economic data front next week include key inflation data in the form of consumer and producer prices for January. With the Fed having hit the brakes on rate hikes but the economy still seeing strong jobs growth, it seems likely that investors may want to watch inflation data carefully to see if inflationary pressures ratchet up, which could cause the Fed to change its stance, or if they continue to remain muted. In the latter case, it seems likely that Wall Street will continue to get a breather from one of the worries that helped tank stocks last year, namely the fear of an over-aggressive central bank.

We’re also scheduled to get a report on retail sales for December. It could be interesting to see how retailers did during one of the months when consumers tend to spend a lot of money on holiday gifts. There have already been indications of strong holiday spending, but there are also indications that as 2019 progresses, American consumer spending may not remain as robust. (See more below.) In other shopper-related news, the February University of Michigan consumer sentiment index is scheduled for release a week from today.

Checking in on Consumers: U.S. economic data has been a somewhat mixed bag. On the one hand, we’ve seen some really great jobs data, but we’ve also seen a slowdown in factory orders and a sluggish housing market. So, it may be particularly worth paying attention to consumer spending-related data since the American consumer makes up a far larger chunk of the domestic economy than any other single input like manufacturing or housing. 

Last week, consumer confidence numbers for January declined more than expected, and consumer credit data, out Thursday, appeared to continue to paint a picture of an American consumer that, while seemingly not down and out, isn’t showing as much strength as retailers might want. Total outstanding consumer credit in December increased by $16.5 billion, but most of that was in the form of non-revolving debt like student or auto loans while just $1.7 billion of that increase was from revolving credit, like credit cards. “The extension of consumer credit is rooted in non-revolving debt while revolving credit, which can be a support for discretionary spending, is not expanding in a robust manner,” according to Briefing.com. That may not bode well for retailers.

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.