With Trade Talks Thrown Into Question, Investors Hunker Down

With Trade Talks Thrown Into Question, Investors Hunker Down

(Thursday Market Open) If you shut down your market app after yesterday’s close and didn’t open it again until this morning, you might think the market is coasting through the current round of trade talks on a relatively even keel.

Overnight, however, equity futures went on a wild ride, with the futures on the S&P 500 index down about 40 points at one point and futures on the Dow Jones Industrial Average down over 300.

The catalyst? Lots of noise ahead of high-level trade talks scheduled to begin today in Washington.

Conflicting Reports

It’s been hard to make sense of the news flow, and by this morning equities index futures had pared their losses as investors apparently strap in to see what actually happens. A bombshell report late Wednesday from the South China Morning Post said China and the United States didn’t made progress on key issues in two days of deputy level talks, adding that higher level negotiations were expected to last for only one day instead of two.The White House told CNBC that its wasn’t aware of a change in China’s Vice Premier Liu He’s schedule. But a participant in the negotiations later told the news outlet that the schedule was “fluid” and Friday’s session was in question, with the possibility still open that the talks could conclude today instead of Friday.In more positive news on the situation, Bloomberg reported that the Trump administration is considering implementing a currency deal with China early and could suspend a tariff increase next week. Meanwhile, the New York Times said the White House is planning to allow some U.S. companies to supply non-sensitive goods to blacklisted Chinese telecom company Huawei Technologies.If there were ever a time to ignore some of the noise and wait and see what ends up shaking out, now would seem to be that time. The news flow this week–let alone overnight–has intensified to a degree as to become almost not useful for investors with a long-term portfolio outlook. The back and forth can be great if you’re a trader, but longer-term investors would be better served waiting for concrete developments such as officials putting pen to paper to sign a deal.

Today’s Worry Comes After Yesterday’s Optimism

If a rising tide lifts all boats, then a receding tide might do just the opposite. And this week it’s been truly a back and forth like waves on the beach.

But instead of lulling investors into a calm state, it seems that the market has been fretting ahead of the trade talks scheduled to begin today with the anxiety being alternately ratcheted up or soothed by the ebb and flow of the headlines.

On Wednesday, stocks ended on a positive note as investors were cheered by a Bloomberg report that said China is still open to a partial trade deal and a Financial Times article that said the Asian nation has offered to boost its yearly purchases of U.S. soybeans.

All of the S&P 500 Index sectors ended the day in the green, just the opposite of what happened in the previous session. The trade-sensitive Information Technology sector led shares higher, helped by a 1.45% gain by chipmakers that derive a substantial portion of their income from China. (See more below.) Apple (NASDAQ:AAPL) on Wednesday seemed to also get a boost from the trade optimism, and the stock appeared to also get some help on news that an analyst raised his price target for the electronics maker.

But stocks pared their gains heading into the close after Reuters reported that China has lowered expectations for substantial progress in this week’s talks.

With the high level talks possibly shortened by one day this week–ahead of when tariffs on $250 billion in Chinese goods are scheduled to increase next week–it’s not looking like a comprehensive deal that would alleviate more than a year of market tension is in the cards.

While it isn’t exactly surprising given how the trade war has dragged on and intensified, the situation still seems disappointing for investors who have been hoping for a conclusion to what is arguably the biggest issue holding back the stock market.

Don’t Forget The Fed

During the session Wednesday, before optimism about a trade deal began to fade, investors also got a peek into the mind of the Fed, which released minutes of its most recent meeting. The minutes showed that Fed officials were more anxious about the economy as trade policy uncertainty and conditions abroad weighed on the outlook for economic activity. Several Fed members said the likelihood of a recession had increased.

The gloominess may have a silver lining for stocks in that it could encourage members of the central bank’s rate setting committee to further lower interest rates this year. The futures market as of late Wednesday was showing an 85% probability of a rate cut at the Fed’s meeting later this month while that probability was just 53.3% on Sept. 10.

Still, a rate cut is far from certain as Fed officials were divided about cutting rates last time around and the economy still shows some bright spots that could argue that more dovish monetary policy, which can result in problematic inflation if applied improperly, might not be necessary.

However, this morning the latest reading on inflation was softer than expected. The consumer price index for September registered no change when a Briefing.com consensus had expected a 0.1% rise. Meanwhile, the core reading rose just 0.1% when a 0.2% gain had been expected.

The muted inflation picture could give the Fed more leeway to cut rates if officials think such a move would help the economy.

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FIGURE 1: WHIPSAW SOX.The PHLX Semiconductor Sector Index (SOX – candlestick) outperformed the broader S&P 500 Index (SPX – purple line) on Wednesday as optimism about a deal between the U.S. and China lifted the trade sensitive segment of the market. Chipmakers are seen as a kind of proxy trade on the daily ebb and flow of news on the trade situation between the world’s two largest economies as companies in the sector derive a significant portion of their income from China. Note the movement in SOX relative to SPX in this six-month chart. Data source: NASDAQ Chart source: The thinkorswim(R) platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.

Cautiously Optimistic: A fresh reading on the pulse of small firms in America paints a picture of increasing uncertainty even as business conditions in general remain solid. The September small business optimism index from the National Federation of Independent Business registered 101.8. That was down 1.3 points from the prior figure but still fell in the top 20% of all readings in the index’s 46-year history. The survey showed no sign of a recession as businesses continue to create jobs, spend capital, and invest in inventory. Meanwhile, companies are having trouble finding workers to fill the jobs they have open.

But uncertainty has been on the rise as tariffs look to be negatively affecting many small firms and the Fed’s cutting of interest rates has introduced some wariness, the report said. “Perhaps the country will indeed talk itself into a recession, but not anytime soon,” said NFIB chief economist William Dunkelberg.”The persistence of unfilled job openings and reports of a deficiency of job applicants indicate that there is still substantial economic optimism about the economy on Main Street.”

High and Tight: The labor market still seems relatively tight despite the latest data showing a dip in the overall number of job openings. According to the latest Labor Department Job Openings and Labor Turnover Survey there were 7.051 million jobs that needed filling in August, marking the weakest level since March 2018 and the third monthly drop in a row. But that headline figure is still relatively near the all-time high of 7.6 million from late last year, and businesses hired more people during the month than they saw leave. According to the survey, there were more than 5.7 million new hires in August while around 5.6 million people quit their jobs or were laid off or fired, increasing the total number of nonfarm jobs in the nation.

Even as demand for labor remains relatively high, unemployment is at multi-decade lows. The low unemployment could mean there aren’t as many people who need jobs, which would tend to slow new hiring. It also means there isn’t as big of a pool of available labor to hire from, which can lead to inflation as businesses have to offer more compensation to attract workers. But while the tight labor market is a headache for hiring, as the small business survey indicated, it’s an indicator of underlying strength in the economy.

Good Trading