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Trade In Focus Ahead Of G20 As Market Digests Walgreens, Conagra Results; Nike Waiting In The Wings

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Trade In Focus Ahead Of G20 As Market Digests Walgreens, Conagra Results; Nike Waiting In The Wings

Thin trading could be the theme today and tomorrow as it doesn’t look as though many investors want to put any big new positions on ahead of this weekend’s trade talks.

This is a time when if you’re trading the market, you might want to consider being careful with position-sizing due to the thin volume. There may be some individual stock stories to follow with earnings news coming in, but aside from that the range could be narrow, as it was in overnight trading.

Media reports this morning say China plans to present President Trump with a set of terms at G20 to settle the long-festering trade dispute. The terms sound like they’re mostly a laundry list of what Beijing wants, so it’s unclear how helpful this will be. 

Beijing is insisting that the U.S. remove its ban on the sale of U.S. technology to Chinese telecommunications giant Huawei Technologies, The Wall Street Journal reported. Beijing also wants the U.S. to lift all punitive tariffs and drop efforts to get China to buy even more U.S. exports than Beijing said it would when Trump and President Xi met last December. In return, China apparently will sketch out some ways it can help the U.S. with geopolitical security concerns.

These don’t seem like the type of concessions on issues like intellectual property that the U.S. has been pressing China for, but it’s not necessarily a bad thing that the Chinese are at least putting some terms on the table ahead of the meeting this weekend. So far, U.S. stocks aren’t showing much reaction in pre-market trading. Some analysts say the best that can be hoped for at G20 is a pledge to resume talks and put off new tariffs (see more below).

Stocks in Asia posted gains earlier Thursday on hopes that there might be some sort of tariff truce, but as it became clear what the Chinese were proposing, stocks in Europe grew more cautious and U.S. futures rolled back initial gains.

While the market ponders these new trade developments, there’s also a chance that shares of Boeing Co (NYSE: BA) could put pressure on the Dow Jones Industrial Average ($DJI). The stock is down nearly 3% early Thursday on reports of more trouble for the 737 MAX jet after the Federal Aviation Administration (FAA) found another software flaw. It’s actually pretty impressive how the market is holding in here despite the negative BA impact as that stock gets slapped around.

Another stock in the limelight this morning is Nordstrom, Inc. (NYSE: JWN), which got hit with a “sell” rating by a market analyst and was down nearly 3% in pre-market trading. The analyst note also warned about general headwinds for the retail sector. We’ll see if that puts pressure on any of JWN’s competitors.

Earnings, GDP, Bitcoin In Focus

In earnings, Walgreens Boots Alliance Inc (NASDAQ: WBA) found a way to beat analysts’ consensus for both revenue and earnings per share, helped by rising prescription drug prices. The industry has had problems lately as more people shop online and insurers pay pharmacies less. Shares rose 2% in pre-market trading.

On a less positive note, Conagra Brands Inc (NYSE: CAG) missed Wall Street’s earnings expectations and saw its shares come under sharp pressure. This could be another pain point for the Staples sector after General Mills’ (NYSE: GIS) earnings received a frosty market reception yesterday.

The final reading for U.S. Q1 gross domestic product (GDP) came in right down the middle on Thursday at 3.1%, in line with Wall Street’s consensus and unchanged from the previous estimate. It’s a good number, but doesn’t appear like it’s going to have much market impact.

There was an interesting cryptocurrency development last night as Bitcoin fell about 1,800 in less than 30 minutes. At this point, it appears no one can really say what the reason was, except that the magnitude and velocity of the runup over the last couple months might have gotten ahead of itself. This kind of volatility is one of the knocks on Bitcoin and other cryptocurrencies.

Elevated VIX Looks Locked In

Whether the market is hot or cold lately, volatility seems to stay high. Don’t necessarily expect that to change as the week winds down.

The Cboe Volatility Index (VIX) seems locked in above 16 the last few days, and that might not change right away with the G20 meeting between Presidents Trump and Xi coming up Saturday. As the anticipation builds, it’s possible we’ll see a risk-off type of trade these next two days. That could be accompanied by more strength in the VIX as investors steel themselves for possible turbulence when trading resumes next week following the meeting.

It’s pretty hard to see many investors risking any big bullish bets here, considering the market remains near all-time highs and the meeting occurs after trading ends for the week. This is one of those times where it probably pays to consider taking extra care if you plan to move into or out of the market. In fact, there’s no penalty for standing aside if you’re not sure exactly where things might go. 

That’s what a lot of market participants appeared to do on Wednesday, with consolidation of recent trends pretty evident. The rally in Treasuries took a step back, with 10-year yields climbing to 2.05% from below 2% last week. Fed Chair Jerome Powell’s remarks earlier this week about “grappling” with policy might have hurt the Treasury market, and so did St. Louis Fed President James Bullard talking down investor hopes for a 50-basis point rate cut in July. Some analysts noted a “hawks and doves” approach here, with Powell considered a hawk and Bullard a dove, but both coordinated in their remarks.

The other trend that took a breather Wednesday was the rally in defensive sectors. Real Estate and Utilities both got hammered. Consumer Staples also stood down, hurt in part by consumer sentiment worries. General Mills took a hit from weak earnings, and that might have weighed on other food stocks, too.

Enthusiasm Lags As Key Weekend Meeting Approaches

Ahead of G20, investors might be taking some profit on recent winning positions in Treasuries and non-cyclical sectors. That doesn’t necessarily mean, however, that there’s a lot of enthusiasm for new bids in the cyclicals. Technology was the exception Wednesday, as strong earnings and guidance from Micron Technology, Inc. (NASDAQ: MU) helped lift the entire semiconductor sector, but semis are still down about 10% from their 52-week high.

The other major cyclicals (aside from Energy, which has its own rally going thanks to higher crude prices), didn’t really join Technology in Wednesday’s upward move. Industrials, Financials, Materials and, for the most part, Consumer Discretionary, just couldn’t find much buying interest. This might be the kind of lackluster trading we see over the next day or two. In fact, the atmosphere might be almost like you see before a Fed meeting, with the market not moving much one way or the other but volatility elevated. The market could be particularly vulnerable to sharp moves on any geopolitical headlines at this point.

In one sign that people aren’t all that eager to jump in, decent durable goods data and Treasury Secretary Steven Mnuchin making positive comments on China trade early Wednesday only seemed to help the market for a few minutes before the scale got back into balance. A big draw in crude supplies announced mid-morning Wednesday helped crude, but the commodity couldn’t really extend gains from there.

Later today investors will brace for a key earnings report as Nike Inc (NYSE: NKE) ties its laces (see more below). One thing that might help determine NKE’s outcome is consumer sentiment, which has been falling in China—one of the company’s big markets—and recently came up short in the U.S. as well.

Another factor that might be front and center for NKE is any insight on how the U.S. dollar might be affecting overseas business for NKE and others. The dollar index has weakened recently to around 96 from highs above 98 back in May, hurt partly by the dovish Fed talk. Still, the dollar was strong for a lot of Q2, and that could be a weight on some companies’ earnings.


Figure 1: UTILITY CLOSET: After scampering to big gains over the last three months, the Utilities sector (candlestick) has come under pressure the last few days. This could indicate profit taking or be a sign of some investors getting less optimistic about a potential 50-basis point rate cut next month. Staples (purple line) have also been under pressure this week. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Will China’s Footprint Show in Nike Earnings? Retail bellwether and Dow Jones Industrial Average ($DJI) component Nike reports after the close today, and investors will likely watch closely for any signs of trouble in China. NKE’s China business looked stellar in its previous quarter, rising 24%. At that time, NKE said it remained bullish about its business there despite the tariff tangle. For NKE, trade issues are a significant concern because, like most major athletic shoe makers, it relies heavily on imports from China. So escalating tariffs translate into escalating costs, which companies either have to absorb or pass on to customers, who may be less willing to spend more. With that said, it’s no surprise that NKE is among the companies that have come out against increasing tariffs on Chinese imports. 

Looking ahead to the fiscal Q4 report due this afternoon, the third-party consensus earnings estimate is $0.66 per share, down from $0.69 per share a year ago. Revenue is projected to increase about 3.9% to $10.17 billion from $9.79 billion last year.

Data in Spotlight: This morning’s unsurprising GDP report wasn’t the last of the major data points ahead of G20. Friday morning brings a key inflation reading in the form of personal Consumption Expenditure (PCE) prices for May. Last week, Fed Chair Powell talked about how inflation hasn’t been keeping up. Tomorrow’s report could help show if that trend continued. The Wall Street consensus for PCE prices is a small 0.2% rise, with core PCE up just 0.1%, according to Briefing.com. Consider watching the year-over-year rise in PCE as well and how it compares with 1.5% and 1.6% for headline and core, respectively, in April.

Also, consider keeping an eye out early next week for OPEC’s meeting. Many analysts expect the current 1.2 million barrel-a-day production cut to get extended, and if that’s the case, it seems doubtful there’d be much market impact. Any deviation from that, however, could help move crude one way or the other.

Best Hopes: A lot of excitement swirls around the scheduled meeting this Saturday between President Trump and President Xi. It’s probably fair to say few are looking for a major breakthrough, but perhaps one positive outcome would be if the leaders emerge with promises of no new tariffs while trade talks resume. That’s far from assured, but would likely soothe many investors and companies worried about the looming threat of U.S. tariffs hitting hundreds of billions of dollars in additional Chinese goods and any reprisals from Beijing on American products. 

While Treasury Secretary Steven Mnuchin appeared to raise the market’s spirits Wednesday with his remark about previous talks taking the two countries “90% of the way” toward a deal, that last 10% could be tough if it concerns touchpoints like intellectual property, Chinese government subsidies to exporters, and forced technology transfers from foreign companies doing business in China. Seasoned China watchers say the country isn’t likely to easily give in on stuff like this, but U.S. trade negotiators are probably hammering away on those very points. That might be what caused the breakdown in talks more than a month ago.

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.

Posted-In: Cryptocurrency Earnings Government News Regulations Politics Global Markets

 

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