(Tuesday Market Open) Trade tensions remain the overriding story this morning as investors and traders gear up for a new day of trading after fierce selling yesterday.
But the narrative seems to have changed just a bit as glimmers of optimism emanate from Washington and Beijing. President Trump said he would meet Chinese President Xi Jinping in June during the G-20 summit and that it will probably be a “very fruitful meeting.” And Chinese Foreign Ministry spokesman Geng Shuang said the two nations have agreed to continue talks.
As negotiations are expected to continue despite the heightened tensions, things could still end up getting smoothed out. It seems like we’re seeing the sausage being made, and it’s a pretty ugly process that has led to considerable unease among investors.
The selling we saw yesterday and last week is arguably a re-evaluation of equities without as much trade-deal optimism baked into the cake as we saw earlier in the year. Still, it seems likely that the market will remain on edge and that volatility could remain elevated. Wall Street’s main fear gauge, the CBOE Volatility Index (VIX) has pulled back this morning but remains higher than levels we saw in February, March, and April as stocks climbed.
In news from across the pond to counteract some of the geopolitical doom and gloom, data showed that the unemployment rate in the United Kingdom fell to its lowest point since the 1970s.
Case Of The Mondays
U.S. stocks ended Monday well in the red after China announced retaliation after the U.S. last week raised tariffs to 25% from 10% on $200 billion in Chinese goods. And unlike the previous Monday the market didn’t stage much of a rally to erase much of the losses. Rather, the Dow Jones Industrial Average ($DJI) and the S&P 500 index (SPX) each finished the session down around 2.4%.
The Trump administration’s tariff decision and China’s response mark an escalation in a trade war that has fed global economic growth worries but that many investors and traders seemed to think might have been resolved fairly soon.
That optimism over the last few weeks had helped push stocks to record highs but, with no deal in place, also left the market vulnerable to the sharp pullback we’ve seen in recent days.
For those looking for a silver lining, it seems that Monday’s selloff wasn’t a full-blown panic. If it had been, the gains in the three horsemen of risk–the VIX, bond prices and gold–would likely have been higher.
For active traders, who tend to thrive on volatility and price action regardless of the direction, Monday may have been a day to roll out the welcome mat. And days like Monday can also be advantageous to longer-term investors who might see a pullback as an opportunity to pick up shares in companies they believe in fundamentally over the long run. After all, earnings often drive markets, even though they can get overshadowed by headlines in the shorter term.
The tech-heavy Nasdaq (COMP) was the hardest hit of the three main U.S. indices Monday as shares in the Information Technology sector short-circuited. The group got taken out to the woodshed, falling more than 3.4% to make it the biggest loser of the day. Chipmakers helped to weigh on the sector, as they often perform poorly when worries about China ratchet up since they tend to derive a significant portion of their revenue from the Asian nation.
Industrials fell more than 2.8% as trade war proxies Caterpillar (NYSE:CAT) and Boeing (NYSE:BA) helped pressure the sector. Deere & Company (NYSE:DE), which reports earnings later this week, was the biggest loser in the group. (See more on DE below.)
Meanwhile, oil prices did a marked about-face on the news of the retaliatory tariff hike. They had found early support after two Saudi oil tankers suffered an attack in the Persian Gulf over the weekend. But they fell into negative territory as investors and traders appeared to fret about what a prolonged trade war could mean for crude demand. Still, U.S. crude prices remained above $60, an area of support that might continue to hold amid tensions over supply concerns from Libya, and U.S. sanctions on Iran and Venezuela.
While everyday drivers, transportation companies and manufacturers might like to see the commodity slip below that level, higher oil prices are a boon for producing companies as well as the economies and currencies of nations that export black gold.
Turning to real gold, the precious metal jumped as the hand-wringing over the trade situation sent investors flocking to the safe-haven investment, boosting June futures to their highest point in a little over a month. Investors weren’t just turning to gold as a perceived store of value. U.S. government debt was also in higher demand as market participants sold stocks and bought bonds. That pushed yields lower, hurting the Financials sector and helping Utilities.
S&P 500, Gold, U.S. Treasuries
FIGURE 1: ANY PORT IN A STORM. As the S&P 500 (SPX – candlestick) fell sharply Monday, investors moved into the relative safety of gold (/GC – blue line) and U.S. Treasuries, including the 10-year (TNX – purple line). That pushed the precious metal’s price higher and Treasury yields lower. Data sources: S&P Dow Jones Indices, CME Group (NASDAQ:CME), Cboe Global Markets. Chart source: The thinkorswim(R) platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
A Jolt for Utilities: Utilities are having a pretty good year so far, and on Monday they made up the sole sector that gained ground. (Real Estate was flat.) It appears that falling Treasury yields helped the Utilities sector, which was up more than 16.8% for the year as of the close Monday. As they generally have a track record as solid dividend payers, Utilities are often considered bond proxies. They’re also considered a defensive sector, as households still need electricity whether the economy is doing well or poorly. So when yields fall, that makes these stocks more attractive. And when investors move out of more cyclical sectors like Industrials or Information Technology, like they did Monday, they can also end up buying more defensive shares, such as those of Utilities.
Farmers Cautious: U.S.-based farm equipment maker Deere (DE) was the biggest loser in the Industrials sector on Monday. Shares of the company, which reports earnings on Friday, were down nearly 2% year to date including Monday’s close. The outlook hasn’t been looking great for U.S. farmers – especially soybean growers – as the trade war has hit agricultural exports to China. Stung by the trade war and slumping prices amid lower global demand, farmers have become more cautious when it comes to investing in farm equipment. Now that optimism about a deal getting done soon has waned, it seems like investors are thinking that trend will continue for some time, at least as reflected in DE’s shares Monday. It may be worth considering tuning in to DE’s management presentation on Friday to see what executives might have to say about the trade issue.
Technical support: The S&P 500 managed to hold above a key level of psychological support around 2800 on Monday. If that becomes a floor, it could be a bullish sign for the market, while a meaningful break below that could invite more selling. A break below 2800 could force a test of the 200-day moving average, currently at 2775. The 200-day indicator is often seen by technical traders as a key support level.