Market Overview

Are Markets Turning Deaf Ear to Trade Fears? Benchmarks Up In Early Going


The markets hurdled higher in early trading today as investors in the U.S. and abroad appeared to ignore the noise out of Washington, D.C., according to some market watchers.

The markets also looked to get a boost after headlines surfaced of a potential summit between North and South Korea, which some analysts said could signal that North Korea might be backing off of aggressive military action, according to published reports. In the early going, the Dow Jones Industrials ($DJI) was up by more than 100 points. The S&P 500 (SPX) and the Nasdaq Composite (COMP) pointed to the upside as well.

On the tariff front, other analysts said the market moves higher might suggest that fears of an all-out trade war over President Trump’s tariff proposals could be easing as opposition here and abroad widens.

There’s not much economic data on the calendars that is likely to push the markets in either direction. Given that, investors might want to keep their trading focused on companies with good fundamentals rather than outside forces that might rattle markets.

Shares of Target Corporation (NYSE: TGT) were off as much as 4% in the early going. The Minneapolis-based discount store chain reported Q4 earnings that missed Wall Street’s expectations by a penny, though revenues were better than forecasts. Costco WholeSale Corporation (NASDAQ: COST) is scheduled to report after the bell.

Nordstrom, Inc. (NYSE: JWN) shares retreated moderately in the early going. The company rejected the founding family’s bid to take it private, according to reports, but the family said it would draw up another one.

Monday’s Mayhem Turn

The markets were whipsawed Monday, starting the session to the downside, only to sharply reverse course and stay solidly higher throughout the day. That helped snap four straight days of overall market losses as all three major benchmarks ended the session up better than 1% and the Russell 2000 (RUT) advanced about 0.8%.

Some analysts noted that everything started to turn around about mid morning. That was about the time that House Speaker Paul Ryan urged President Trump to rethink his proposal to slap a 25% tariff on steel and a 10% levy on aluminum imports.

“We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan,” AshLee Strong, a Ryan spokesperson, said in a statement. “The new tax reform law has boosted the economy and we certainly don’t want to jeopardize those gains.”

Trump insisted later he would not back down on tariffs but said he would make exemptions for Canada and Mexico if a “new & fair NAFTA agreement is signed,” according to one of his tweets yesterday. Europe said it was mulling its response to tariffs, possibly retaliating with its own levies on certain U.S. imports, according to published reports.

The Dow was up as much as 422 points intraday, finishing higher by more than 330 points. All 11 sectors of the SPX settled on higher ground with the energy and technology sectors among the biggest advancers. Steel stocks mostly tumbled across the board.

Oil prices rose by more than 2% to mark their largest single dollar and percentage gain in more than three weeks, and were on the upside in the early going. (See chart.) Reports of supply disruptions in Libya coupled with supply issues in Venezuela might have helped boost the prices, according to some analysts. Bloomberg also reported that stockpiles at the largest U.S. hub in Cushing, Okla., were at the lowest levels since 2014. Meanwhile, the International Energy Agency (IEA), released a five-year forecast that said the U.S. would become the world’s top crude producer by 2023.

“Rising oil production from the U.S. alone will need to cover 80% of the world’s demand growth over the next two years,” the IEA said, with U.S. output set to grow by 3.7 million barrels per day over the next five years, according to a report in MarketWatch. (See below.)

The Volatility Index (VIX), Wall Street’s fear gauge, retracted a bit more than 4% to settle below 19. In pre-market trading today, the VIX fell below 18. That could be a sign that, though immediate fears may be softening, there still is some worry among investors. On a year-over-year basis, the VIX had been mostly trading in a tight range of 9 to 13 until the beginning of February.

FIGURE 1: HOT DAY FOR OIL PRICES. Crude oil prices got a 2% boost Monday as talk of oil shortages and a forecast of growing demand made headlines. It was the biggest price increase in more than three weeks (as shown above). Prices rose in early trading. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Actions 1, Words 0

That’s the score from Sam Stovall, CFRA’s chief market strategist. In a note Monday, Stovall said the wall of worry building itself around the markets— reflecting changing expectations of inflation, interest rates, politics and now the prospects of a global trade war— has little foundation. Given recent market moves, his take is that market participants’ actions are speaking much louder than words.

Of the sub-industries in the S&P Composite 1500, 66% of them are trading higher than their 50-day moving averages, marginally higher than the average 65% recorded for all weeks since 1995, and higher than the 60% reading on Feb. 9, he said. “Right now, market and sub-industry returns hint that these concerns may be overblown,” he said.

About that Oil Forecast

As noted above, the IEA projected that the U.S. could be the biggest producer of oil in the next five years, covering 80% of the world’s demand for oil over the next two years alone. But what if the IEA is wrong? Could be trouble, Phil Flynn, senior market analyst at Price Futures Group, told Marketwatch.

“If they are wrong and the U.S. misses that growth target, it is likely the globe will be woefully undersupplied,” he said. Of course, he could be wrong too. Either way, the IEA noted in its report that there is a need for production operations’ investments.  

The Yield Curve’s Crystal Ball

The spread between long-term and short-term interest rates is a “strikingly accurate predictor of future economic activity,” according to an economic report released Monday by the San Francisco Federal Reserve. The spread between the two-year yield and 10-year yield tend to be widely considered economic indicators of growth and recession. An inverted curve, in which the two-year yield is higher than the 10-year, typically points to a high probability of a recession, according to the Fed.

“Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve,” the report stated. “Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession. While the current environment is somewhat special—with low interest rates and risk premiums—the power of the term spread to predict economic slowdowns appears intact,” according to the report.

Posted-In: JJ Kinahan TD Ameritrade The Ticker TapeNews Bonds Commodities Markets


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