Market Overview

Trade Winds Blow Milder As Progress Cited In U.S. Talks With China


This week could help set the tone for the next several. Geopolitical events like U.S. trade relations with China are starting to dominate the conversation as the data calendar looks light and earnings outside of the retail sector slow to a crawl.

Early Monday, stock futures rallied after Treasury Secretary Steve Mnuchin said that the U.S. would hold off on any tariffs against China as the two countries continue their talks. Mnuchin told CNBC Monday morning that there has been “meaningful progress.” 

Aside from China, other geopolitical issues like tension in the Middle East and the coming talks with North Korea continue to draw attention. If you remember the last time the market had little data or earnings to trade on a couple of weeks ago, stocks zipped up and down all over the place because any bit of rumor or news on the geopolitical side got people nervous.

Dialing up chances for volatility is the approach of a long holiday weekend. Sometimes volume gets clipped ahead of holidays, and thinner volume can lead to more choppiness. Right before the long Memorial Day weekend, the government delivers its monthly durable goods report Friday. Those data have the potential to increase concerns about inflation and economic overheating. Another element in the mix is a heavy calendar of Fed speakers the next few days, and minutes from the Fed’s last meeting come out Wednesday. It doesn’t look like a week for the faint of heart, and it might be a good time for long-term investors to consider not getting too caught up in the daily noise.

Another Trip to the Store for More Retail Earnings

So far, retail earnings have looked better than expected, but things are far from over.

It’s all retail all the time this week, with Kohl’s Corporation (NYSE: KSS), Target Corporation (NYSE: TGT), Lowe’s Companies, Inc. (NYSE: LOW), Gap Inc. (NYSE: GPS), Foot Locker, Inc. (NYSE: FL), and Tiffany & Co (NYSE: TIF) among the big names scheduled to report. Last week saw mixed signals from retailers, with Macy’s Inc. (NYSE: M) and Walmart Inc. (NYSE: WMT) both delivering impressive results while J.C. Penney Company Inc. (NYSE: JCP) and Nordstrom, Inc. (NYSE: JWN) received poor reviews from the Street. TGT is arguably the biggest one to watch in the days ahead (see more detail below).

The retail parade comes amid a background of steadily rising oil prices and interest rates. Crude oil hit $80 a barrel in Europe last week for the first time since 2014, and some companies like Deere & Company (NYSE: DE) are starting to report higher costs in part due to the energy rally. For retailers, this could also be a concern. Some of the big box stores like WMT might feel the bite from higher gas costs before higher-end retailers like M simply because M tends to cater to a higher income customer base that’s less vulnerable to the impact of $3 a gallon pump prices.

Meanwhile, the housing market comes into focus this week with earnings from home builder Toll Brothers Inc. (NYSE: TOL). It could be interesting to listen to TOL’s call and see if executives there are starting to notice any impact from seven-year highs in mortgage rates. The average cost for a 30-year fixed-rate mortgage rose to 4.61 percent last week from 4.55 percent the week before, The Wall Street Journal noted. That’s up from 3.99 percent as recently as January. Housing starts for April reported last week came in a bit below Wall Street analysts’ consensus, and a one-percentage-point increase in rates can lead to a reduction in home sales of 7 percent to 8 percent, the WSJ reported, adding that first-time and moderate income borrowers could be hurt the most.

Yields Pause But Fed Hike Chances Still Seen at 100 percent

The closely watched 10-year Treasury yield—which helps determine what people pay to borrow—leveled off a bit early Monday to around 3.07 percent, down from highs above 3.1 percent earlier in the week. The gap between U.S. and European yields is getting pretty wide, with the benchmark German 10-year bond yield around 0.57 percent. In the recent past, a wide gap between U.S. and German yields has sometimes helped pull U.S. yields lower, so we’ll see if that happens again. Another thing to wonder about is how this rally in U.S. yields might affect the Fed’s plans as it prepares for its next meeting in just a few weeks. The futures market continues to predict 100 percent chances of a rate hike by the mid-June gathering, and about a 50-50 chance of four rate hikes this year.

On a technical note, the S&P 500 Index (SPX) didn’t make too many big moves last week, and seems to have found some support at the psychological 2700 level. That could be an important price to watch in the days ahead. If the SPX falls below 2700 intraday, consider watching to see if helps trigger more selling or if buyers start to show up. Recently, drops below support have generally drawn buyers. However, there hasn’t been much traction to the upside over the last week or so. The market appears to be range-bound and still seeking direction.

Looking back at last week’s sector performance, it wasn’t much to write home about. Of the 11 S&P 500 sectors, the only ones posting positive results were materials, energy, industrials, and health care, and none of those rose more than 1.6 percent. The overall SPX fell just a smidgen, but the small-cap Russell 2000 (RUT) performed well and rose to new record highs. The dollar also gained and so did stocks in Europe and Japan. It could be interesting to see if the pattern of strength in small caps rolls into the new week.

chart_5_211.jpg FIGURE 1: ENERGY BOOST. Over the last month, the energy sector (purple line) has outperformed the overall S&P 500 Index (candlestick), while the financial sector (blue line) continues to lag. Tepid performance from financials is arguably one of the reasons for the market’s general lack of traction lately, while strength in energy is a mixed blessing as it signals rising costs for fuel. 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.

Turn-Around Friday for Deere

Rarely do you see fortunes turn at such a breakneck pace as they did early Friday for Deere (DE). Before the market opened, DE fell in futures trading as investors seemed to focus on the company’s rather wide miss of Wall Street analysts’ consensus EPS estimate. But minutes after the opening bell, shares rallied more than 6 percent. Maybe cooler heads prevailed. Though DE’s EPS didn’t meet the average Wall Street analyst estimate in part due to rising costs, it did shine in other areas and EPS was up sharply from previous quarters. The company also reported strong demand for its equipment products and raised its full-year earnings forecast. Deere isn’t completely out of the woods, however. Executives expect input costs to continue rising, and there’s concern about how deteriorating trade relations with China and possible tariffs might affect business.

Target Coming Up Wednesday

Earnings season is almost over, but not without a word from Target (TGT), scheduled to report results Wednesday before the opening bell. Recall that last time out, TGT missed Wall Street analysts’ earnings per share consensus and the stock took a hit. This time, TGT faces pressure to show that its e-commerce sales can keep up with a solid growth number reported last week by competitor Wal-Mart (WMT), which saw digital sales climb 33 percent. TGT’s digital sales rose 29 percent in Q4. Another factor investors might want to watch is comparable sales, which rose a hefty 3.6 percent for TGT in Q4. WMT’s 2.1 percent rise in comparable sales announced last week seemed to disappoint some in the market. Profit margin is another area to monitor with TGT. It declined in Q4 from a year earlier, so consider keeping an eye on how that metric performed in the most recent reporting period.

Peace Declared in Sorghum War

The 19th Century had its “Opium Wars” between Britain and China, and now the 21st Century “sorghum war” between China and the U.S. might be over and agricultural futures prices jumped early Monday. China announced Friday it has ended an anti-dumping probe into imported U.S. sorghum, used for livestock feed and brewing alcohol, which had all but shut down U.S. sales to China. The country’s Commerce Ministry said Friday that punitive measures on purchases of the crop would “affect the cost of living for consumers” in China, The Wall Street Journal reported. This is certainly something to relish for U.S. farmers, but the overall U.S./China trade dispute goes well beyond sorghum, so don’t be surprised if trade continues to make headlines and potentially helps move the market this coming week.

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: JJ Kinahan TD AmeritradeEarnings News Commodities Retail Sales Treasuries Markets


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