Market Overview

Market Looks Set For More Gains Ahead of Holiday Break

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Momentum from yesterday’s higher close appeared to be helping the market this morning ahead of a holiday-related trading closure and an important jobs report even as trade worries continue to linger.

Gains in equity futures come after U.S. stocks made a comeback on Monday, erasing initial weakness to end in the green (see figure 1 below).

Technology stocks helped boost the market Monday, with the tech-heavy Nasdaq leading the three major U.S. indices with a 0.76 percent gain. Of the S&P 500 (SPX) sectors, information technology was the biggest gainer yesterday. In the loser camp, the energy sector posted the biggest percentage decline as crude oil slipped.

Overall, the gains in equities were apparently capped by continuing pressure from uncertainty over global trade, which has dogged Wall Street for some time. Investors are apparently worried that trade issues between the U.S. and some of its key trading partners could end up putting a drag on global growth.

Risk Aversion Still Present

In an indication that risk aversion was present Monday, the U.S. dollar gained against a basket of other currencies as investors seemed to want the buck as a haven amid tensions related to trade and European migration policy. The greenback also gained after the Institute for Supply Management’s manufacturing index for June came in higher than expected.

That report also apparently boosted Treasury yields, which had been lower as demand for the haven securities increased.

Gold, also considered a safe-haven asset, finished the trading day lower, but that may be because of the stronger dollar. The two assets often move in opposite directions as a stronger dollar makes dollar-denominated gold more expensive, which can help to dampen demand. On Tuesday morning, the dollar and gold each appeared to reverse course.

Trade Roundup

On the trade front, President Trump has talked up a threat to impose global auto tariffs and an Axios report stated the administration had drafted a bill that would allow the White House to raise tariffs without congressional consent.

U.S. goods could face $300 billion in new tariffs from the European Union if Trump implements threatened duties against EU automakers, the Financial Times reported.

Canada on Friday announced billions of dollars in retaliatory tariffs on more than 200 U.S. products. Those tariffs went into effect Sunday.

And reciprocal tariffs from China and the U.S. are expected to take effect at the end of this week. In other China related news, the U.S. government has recommended that China Mobile Ltd. (ADR) (NYSE: CHL) not be allowed to provide services in the nation’s telecommunications market, citing national security.

The question on many investors' minds may be, "is this the start of a global trade war, or is it simply an enhanced negotiation?" Whatever the outcome, it looks like it will take some time for the trade issues to resolve.

Keep in mind that this is a holiday shortened week, with trading on the New York Stock exchange closing early today and remaining closed tomorrow for the Independence Day holiday. Volume could be light today, which can help to exacerbate moves either to the upside or downside.

spx-fri-mon-7-2-18.png FIGURE 1: SPX STARTED WEAK, FINISHED STRONG MONDAY. The S&P 500 Index, along with other indices Monday, began the week with new trade-related weakness, but finished the day on the upswing. The strength has carried through to pre-market trading Tuesday morning. 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. 

Themes to Consider

As Q3 gets underway, it may be worth considering some themes that could dominate trading during July, August and September. First, it doesn’t appear that trade worries are going to go away anytime soon, as investors appear to remain focused on the Trump administration’s trade policy with key global trading partners. We’re also entering another earnings season, and company performance as well as what their leadership says could also influence trading. It remains to be seen what sector could emerge as a market leader. It’s possible that could be the financial sector, now that annual stress tests are behind the banks. A key factor in whether that is borne out could be whether the rate on the 10-year Treasury moves meaningfully above 3 percent and stays higher. Speaking of rates, the Fed funds futures market shows a high probability that the Fed will raise its benchmark interest rate in September.

Following the Rules

If you’re not a full-time trader, you may be one of many buy-and-hold investors who take positions for longer periods of time. But on days when trading gets volatile and the market is moving against you it can be tempting to elevate short-term emotions over long-term strategy. “The market’s action in June left a bit to be desired, especially since its 0.5 percent rise was capped off by a week in which its daily zig-zagging pattern mapped out the design on Charlie Brown’s shirt,” investment research firm CFRA said. Thankfully, “rules-based investment strategies are a godsend to overly emotional investors whose undisciplined responses to market gyrations would otherwise cause them to become their portfolio’s worst enemy.” 

Construction Spending

The latest data show that construction spending has risen for two months after a downturn in March, but spending growth in April was revised lower. Construction spending in May showed a rise of 0.4 percent. That’s less than 0.9 percent growth in April, which was revised downward from 1.8 percent. Private, residential and public construction were all in positive territory in May, while nonresidential construction was down 0.3 percent.  “Combined with the downward revision for April, construction spending will make a smaller contribution to Q2 GDP forecasts than what was originally expected,” Briefing.com said.

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: TD AmeritradeNews Commodities Markets

 

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