Bulls Try To Build On Yesterday's Gains But Looming Fed Decision Could Curb Trading

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(Tuesday Market Open) After a dramatic reversal late Monday, U.S. stock futures moved slightly higher as the Federal Open Market Committee (FMOC) meeting gets underway. Most expect a 50-basis-point rate hike announcement on Wednesday, but the post-meeting Fed statement and Fed Chair Jerome Powell’s press conference will likely draw the bigger reaction. 

Potential Market Movers

As traders await tomorrow’s critical announcement on interest rates and the direction on how the Fed will unwind its $9 billion pandemic-era balance sheet, markets will be parsing more earnings reports and today’s JOLTs job numbers for insights into the strength of the economy.

Drug maker Pfizer PFE reported better-than-expected earnings and revenue but provided earnings lower than expected earnings guidance for its 2022 fiscal year. The stock fell 0.7% on the news. 

Expedia EXPE lost $5 in premarket trading after reporting a quarterly loss per share of $0.47, above consensus loss estimates. against a consensus loss of $0.43 a share. Revenue came in at $2.25 billion. The travel booking site noted the Russia-Ukraine war has slowed some tourism recovery in Europe, added it expects to see positive indicators for a strong recovery in summer travel.

After the close, investors will get more insights into the travel season with an earnings report form Airbnb ABNB.

The semiconductor group is also garnering some attention because NXP Semi (NXPI) beat on top and bottom line numbers and increased its outlook for Q2. The stock rallied 1.7% in premarket trading. Morgan Stanley MS resumed its coverage of NVIDIA NVDA giving it an “equal weight” rating. NVDA was relatively unchanged on the news. After the market close, Advanced Micro Devices AMD will report earnings which will also provide insights into the semiconductor group.

Despite the various news items, stocks are likely to be relatively tame ahead of tomorrow’s Fed announcement. The Cboe Market Volatility Index (VIX) was trading a little lower before the open but still above 31 which may suggest that investors are cautious. The 10-year Treasury yield (TNX) was also slightly lower ahead of the bell which may be signaling that investor are in wait and see mode. However, when accounting for the volatility coming into the announcement, investor should still be ready for anything. The S&P 500 futures are slightly higher and trading around a key level of 4,150. If this level breaks, volatility will likely re-emerge.  

Reviewing the Market Minutes

Investors began the week by picking up where they left off last Friday, selling stocks ahead of Wednesday’s Federal Open Market Committee’s interest rate decision. Before afternoon, the Cboe Market Volatility Index (VIX) spiked up past 36 as the 10-year Treasury yield (TNX) rose 109 basis points to 2.996% in what at that point looked like another tough day for growth stocks.

By the lunch hour, the S&P 500 (SPX) fell more than 1.5%. Afterward, investors were in a buying mood with the SPX rallying to close the day 0.57% higher. Growth stocks turned around with the S&P 500 Pure Growth Index rallying 1.92% and the Nasdaq Composite ($COMP) gaining 1.63%. Apparently, investors used the morning to sell bonds which drove up yields so they could spend the afternoon buying stocks.

Bonds weren’t the only safe havens to fall on Monday. Gold futures fell 2.54% during the session, and premarket was down more than 6% from its April high. Despite selling in some safe-haven investments during the session, the VIX finished above 30, suggesting that investor anxiety is still high.

The rally didn’t get much help from the April ISM Manufacturing Index, which dropped to 55.4%, below the Briefing.com consensus estimate of 57.9% and beneath March’s 57.1%. This report now adds the United States to a growing list of manufacturing slowdowns throughout China and Europe. It showed that U.S. manufacturing was held back by global COVID-19 restrictions, along with supply chain problems, rising inflation, and labor constraints. Such problems keep manufacturers from meeting high demand for their goods. High demand is one reason why many economists and analysts are forecasting better numbers for Q2 and the remainder of the year. However, if demand shrinks, then manufacturers will have bigger problems. 

CHART OF THE DAY: BEAR COUNTRY. The Nasdaq Composite Index ($COMP—candlesticks) broke support more than a week ago and appears to be heading for 12,000. The index is down more than 22% from its all-time high, which is considered a bear market. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Oil Futures’ Future: Oil futures and its related commodity futures were heading lower on Monday morning after China’s non-manufacturing report came in much lower than expected due to Beijing’s ongoing COVID-19 restrictions. However, crude oil futures bounced back, closing 0.63% higher on the day. Likewise, RBOB gasoline futures rallied 1.53% and heating oil futures spiked 5.93%.

Commodity traders have a lot to weigh with potential changes in demand from China and the continued fallout from the Russia-Ukraine war, but the rally in crude commodities may be due to North America’s busy travel season which is almost upon us.  Airlines are still seeing strong bookings which, despite rising inflation, indicated that people are still getting away this summer. Whether travelers go by train, plane, or automobile, trips mean higher demand for crude oil. 

le, trips mean higher demand for crude oil.  

Packing Up: Regarding the upcoming peak travel season, the Dow Jones U.S. Travel & Leisure Index fell 2.65% before trimming its losses to close down just 0.09% on the day. The index appears to be building support around the 1,270 level and despite the scare, support held up on Monday. Airlines have seen a surge in bookings this year, driving a surge in ticket prices. According to CNBC, airlines were burned last year by flight delays and cancellations and so this year they’re leaving space in the schedule to give themselves a buffer in case a new COVID-19 variant or hiring problems surface.

However, consumers really do appear to be prioritizing travel. It used to be that people would go without coffee or take a bag lunch to save for a house. But CNBC also reports that consumers are saving up to make sure they can get away from home. While companies like Amazon (NASDAQ: AMZN) and Netflix NFLX have lost subscribers, companies like Ford F and United Airlines UAL are seeing strong demand.  The road and skies await.

The Munger Effect: This past weekend’s Berkshire Hathaway (NYSE: BRK-A) annual meeting didn’t disappoint on folksy banter about alternative assets. Asked about cryptocurrency, Chairman and CEO Warren Buffett, ever the peacemaker, said he preferred purchasing assets that produced something, like farmland. Munger went a little further: “In my life, I try and avoid things that are stupid, evil and make me look bad in comparison to somebody else…and bitcoin does all three.”

Bitcoin traders appeared unaffected by the slight as Bitcoin futures closed 0.31% higher on the day. However, Bitcoin has recently been in a bear market of its own, by falling more than 43% from its all-time high set in November. However, the cryptocurrency is still up more than 1,200% from its 2018 low.  

Notable Calendar Items

May 4: FOMC Interest Rate Decision and earnings from Novo Nordisk NVO, Moderna MRNA, MetLife MET, and Marriott MAR

May 5: Earnings from Shell SHEL, ConocoPhillips COP, and Anheuser Busch BUD

May 6: Employment situation report and earnings from Alibaba BABA, and Cigna CI

May 9: Earnings from Duke Energy DUK, Simon Property SPG, BioNTech BNTX, and Tyson Foods TSN

May 10: Earnings from Occidental OXY, Suncor Energy SU, and Sysco SYY

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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