Market Seems To Lack Direction As Nerves Flare Over Trade

Investors seem to be nervous, unsure of what to take away from the Fed statement this week and not bullish enough to push the market strongly higher despite a bumper earnings season.  Meanwhile, trade tensions with China have bubbled back to the surface, and investors are looking toward an important jobs report tomorrow.

Equities futures were lower Thursday morning, after stocks finished in the red on Wednesday.

Earnings Reaction This Morning

In earnings news after the bell yesterday, Tesla Inc. TSLA reported a smaller-than-expected loss, better-than-forecast revenue and a cash burn rate that was more slow than expected. But the related conference call with Elon Musk and analysts was contentious. Its shares were down more than 7 percent in pre-market trading.

Meanwhile Spotify Technology SA SPOT stock was down around 10 percent in pre-market trading. Investors appeared disappointed following its first quarterly report since going public earlier this month.

Later today, we’ll see gaming giant Activision Blizzard Inc. ATVI report earnings after the close. In terms of game launches, it was a somewhat quiet quarter for ATVI. The last time the company reported, it wasn’t too long after the release of major games Call of Duty: World War II and Destiny 2.

No Surprises from the Fed

On Wednesday, the big three U.S. indices finished the day lower as investors reconsidered language from the Fed and digested a host of other inputs including rising oil prices, solid results from Apple Inc. AAPL and trade considerations.

Perhaps the biggest news of the day was that, as expected, the Fed left interest rates unchanged as the central bank said inflation is closer to the its long-term goal of 2 percent but seems to be under control. 

Basically, policymakers said what we thought they were going to say and left both bulls and bears to interpret the statement through their own lenses of whether they think the Fed is hawkish or dovish. By the end of Wednesday’s session, it seems that those who see the Fed as hawkish won out, but not by much. Investors could also have been focusing more on the fact that inflation is rising instead of Fed language that it isn’t problematic.

It seems that the market may not get too many surprises from the Fed during the first half of the year. But the last six months of 2018 will be the wild card in terms of more market uncertainty about Fed moves. By early Thursday, the futures market was baking in a 95 percent chance of an interest rate hike by June and about a 71 percent chance of another hike by September. Chances for a fourth hike by the end of the year stood near 40 percent, down from around 50-50 before the Fed meeting.

The dollar, which had been surging vs. other currencies earlier this week, stepped back a bit vs. the euro early Thursday following the Fed meeting. With the futures market projecting lower chances of a fourth rate hike this year, the dollar seemed to settle down a bit, though it remains near its highs for the year.

Bright Spots: Info Tech and Energy

Apple led the information technology sector slightly higher Wednesday, making it one of only two of the S&P 500 Index (SPX) sectors to end in the green.

One statistic from AAPL didn’t seem to get as much market attention as it should have. The company added 100 million paid subscribers over the last year. Overall, Apple is a big psychological driver for the market and Wednesday’s share rise of more than 4 percent added positivity.

Energy was the other S&P sector in the green yesterday, helped by rising oil prices and excitement about the tie up between Marathon Petroleum Corp MPC and Andeavor ANDV. Devon Energy Corp DVN was the biggest gainer in the sector, rising more than 5 percent after the company raised its annual production forecast. (See more on oil below.)

FIGURE 1: DEFENSIVE LINE STRUGGLES The consumer staples sector (candlestick) is the worst performing S&P 500 sector so far this year, as this six-month chart shows. Utilities (purple line), have been tracking higher lately but also remain down for the year. These two sectors are sometimes known as “defensive” ones that investors flock to in tough times, but there’s no sign of that yet. 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.

Jobs Data

As the week comes to a close, investors will be eying an important measure of economic activity, namely the April jobs report. The headline number can often be a trigger for big moves in the market if numbers are substantially above or below expectations. A consensus of economists polled by Briefing.com expect an increase of 190,000 jobs for the month and an unemployment rate of 4 percent. If the consensus number is close to accurate, that would be a big jump from the kind of disappointing March jobs growth. Also consider paying attention to wage growth, as it is a key factor in inflation expectations and is of particular importance given the current tightness of the labor market. Average hourly earnings are expected to rise 0.2 percent, according to a Briefing.com consensus. After hourly wage data comes out Friday, consider watching how Fed funds futures react as market participants use those financial instruments to try to forecast what the Fed might do with interest rates.

Trade Issues Haven’t Gone Away

Worries about a trade war with China seem to have taken a backseat recently amid a strong earnings season. But it’s probably worth bearing in mind that the trade tiff hasn’t gone away. U.S. negotiators are in China this week for talks related to tariffs each country has threatened to slap onto each other's goods. News from those negotiations could move markets. Concerns about the trade conflict may be one reason stocks were under pressure in pre-market trading Thursday.

Oil Seems Conflicted

Oil prices are awash in conflicting data and sentiment that could keep prices sloshing around the $70-per-barrel level. Current headlines are focusing on the Iran nuclear deal. President Trump has to decide by May 12 whether to reimpose sanctions that would likely curb the OPEC nation’s exports. That has provided upside pressure for oil prices, in addition to output restrictions from OPEC and some large non-OPEC producers. A weaker U.S. dollar has also been a boon to prices, but the reserve currency has been making a comeback. This brings us to some headwinds for oil prices. Recent data showed U.S. production hit a record high and U.S. inventories are on the rise. Wednesday’s trade was telling. Government data showed an unexpectedly large build-up in U.S. crude inventories, but oil still managed to gain as the dollar fell and worries about Iranian supply continued.

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