Market Overview

Greener Pastures: Pendulum Swings Back After Market Came Up Red Yesterday

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The pendulum continues to swing. Yesterday it headed deep into the red. Today, it looks like it’s moving back into the green, thanks in part to China taking some measures to support its stock market. That said, continued volatility as this turbulent week marches toward a conclusion wouldn’t seem all that surprising.

The sagging Chinese stock market rebounded more than 2.5 percent Friday after Beijing announced measures designed to support liquidity and share buybacks and to encourage merger & acquisition (M&A) activity. There are other things as well, but from a big picture sense, it looks like China is starting to intervene to help prop its market, and that might ease some of the pressure on Wall Street. 

Another antidote to the pressure cooker came from earnings, where a bunch of firms reporting after yesterday’s close and before today’s open shared mostly positive tidings. Honeywell International Inc. (NYSE: HON) beat Wall Street analysts’ earnings per share estimate and matched on revenue, but lowered guidance. Procter & Gamble Co. (NYSE: PG) beat estimates on both top-and-bottom lines. Shares of both jumped pretty solidly in pre-market trading. 

PayPal Holdings Inc. (NASDAQ: PYPL) also muscled its way to an earnings beat, and offered guidance a little above analysts’ forecasts. Mobile payment volume in Q3 grew 45 percent. The company’s shares jumped more than 7 percent ahead of the opening bell. American Express Company (NYSE: AXP) also beat expectations amid higher card member spending and increased loans. Shares rose about 1 percent early Friday.

So far, 88 percent of reporting companies have beaten on earnings, and 64 percent on revenue growth. Those are strong showings, but some of the misses have been troubling (see more below). In general, though, earnings season is off to a good start.

Will Friday Bring More Turmoil?

Today could be an interesting coda to an eventful week. The question heading into the session is whether the market calms down and starts to level out, or whether renewed selling rolls in to extend yesterday’s sharp losses. 

With info tech earnings ahead from a host of key companies next week and geopolitics still unsettled, it wouldn’t be too surprising to see the market remain on tenterhooks today, especially with volatility still elevated. VIX, the market’s most widely followed “fear index,” climbed back above 20 late Thursday after falling below 18 earlier this week. It’s still down from highs above 25 a week ago, but might bear watching.

Another thing that could bear watching is existing home sales, due soon after the opening bell. The housing market has been under pressure lately as mortgage rates rise, and housing starts data earlier this week didn’t tell a very sweet bedtime story. Consider keeping an eye on the homebuilder and housing-related stocks like Lowe’s Companies, Inc. (NYSE: LOW) and Home Depot Inc. (NYSE: HD), which have been getting hit. Those two home market companies were both down more than 2 percent yesterday.

Big Tech Earnings Week Ahead

Next week is one of the biggest earnings weeks of the season, but already some concerns are creeping in about company outlooks. Several major firms have disappointed with guidance, and that’s arguably one of the factors that knocked stocks off their recent gains. The S&P 500 (SPX) starts Friday just one point above where it closed last Friday, but nearly 60 points above last week’s three-month low. A close above 2767 would mean a positive week. It’s fallen the last three weeks in a row, and is down nearly 6 percent from all-time highs reached late last month.

Geopolitics don’t look like they’re going anywhere soon. The situations in Italy, Saudi Arabia, and China all could continue to play a role in today’s stock market action. Yesterday’s words from European Central Bank President Mario Draghi, in which he hinted that Italy needs to get with the program on its budget, continue to echo. So does the weak inflation number reported by the United Kingdom earlier this week, as well as the continuing Brexit saga. There are worries that the European region could be more susceptible to a slowdown than some analysts had originally thought.

The news wasn’t so hot early Friday from China, either, before Beijing announced those stock market measures mentioned above. China’s government reported that the economy grew by 6.5 percent over the three months that ended in September compared with a year ago. That’s the slowest since 2009. Past isn’t necessarily prologue, but when China’s economy sneezed in late 2015, markets around the world caught a cold.

Also consider watching the technical situation. The S&P 500 (SPX) finished yesterday right at its 200-day moving average of 2768. This level has been a key support point for the SPX most of this year, and whether or not it holds by the closing bell could help set the tone for next week.

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FIGURE 1:  Crude Gets Hit By Dollar. While your eyes were glued to the equity markets yesterday, other markets were on the move as well. This one-month chart shows crude oil falling back toward September lows below $69 on Thursday, partly due to a dollar index (purple line) that appears to be re-testing recent highs. Data Sources: CME Group; ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Greenback Rally Helps Dent Stocks

One factor that might help explain the market’s continued struggles since Tuesday’s rally is the dollar. After falling below 95 last week, the dollar index turned around and climbed back toward recent highs near just under 96 by late Thursday. The dollar’s earlier downturn might have been a support point for the market on Tuesday as some investors grew less concerned about the greenback potentially making U.S. products more expensive overseas, but its reversal since then (accelerated, it appears, by the Fed’s hawkish language in minutes released Wednesday), could be helping create fears of dollar strength putting the brakes on for some U.S. companies. The pressure seems to be hurting some of the big industrial firms this week, many of which have big markets in Europe and Asia. Two numbers to watch here might be the 96 handle for the dollar index, a level the index hasn’t been able to hold very long so far this year, and the dollar/yuan exchange rate, which rose to 6.94 on Thursday and threatens decade lows for the Chinese currency.

Taking China Losses in Context

Speaking of China, its stock market is down approximately 25 percent so far this year after another big drop this week. While weakness in China’s market certainly could be a factor behind the U.S. stock market’s recent struggles, it’s also important to keep Chinese stocks in context. As an analyst explained on CNBC yesterday, the Chinese stock market is chock full of small retail-oriented companies, whose stocks tend to scare easily in a volatile market like the one prevailing this month. It’s not necessarily a reflection of the Chinese economy as a whole, partly because its market cap is relatively low compared to China’s gross domestic product (GDP). So if Shanghai stocks keep falling, it’s not something to ignore, but it’s also not necessarily signs of a meltdown in the wider Chinese economy. Also, the U.S. government announced this week that it doesn’t identify China as a “currency manipulator,” a possible positive development as the two countries continue to clash on trade issues.

Yield Gap In Focus

There’s been a lot of attention paid to the 10-year Treasury note yield hitting 3.2 percent this month, but don’t overlook what its cousin the two-year is doing. It hit a decade high of 2.9 percent early Thursday before retreating slightly. Even with it back below 2.9 percent, the gap between 2-year and 10-year yields remains near 30 basis points, not far from the lows of earlier this year. That gap had grown slightly during the stock market’s sell-off last week, but the Fed’s hawkish minutes Wednesday might have helped put more pressure on shorter-term bonds, which move opposite of yields. The concern around interest rates now is a bit different from what it was earlier this month, arguably. Back then, focus was on Fed Chair Jerome Powell’s comment that rates have a long way to go before hitting “neutral.” Now the concern seems to be more around what “neutral” might mean. A lot of people had been thinking 3 percent, up from the current Fed funds rate of 2 percent to 2.25 percent, but now there’s a theory circulating that “neutral” might be more than 3 percent, judging from the minutes released Wednesday.

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 AmeritradeEarnings News Bonds Treasuries Markets

 

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