(Monday Market Open) Investors are starting their week off confronted by continuing tensions between the U.S. and China, as the trade dispute lingers and the fallout from President Trump’s blacklisting of Chinese telecom giant Huawei widens.
Google parent Alphabet (GOOG, GOOGL) has suspended some business with the Chinese telecom company. GOOG’s shares were down more than 1%. And Bloomberg reported that chipmakers including Intel (NASDAQ:INTC), Qualcomm (NASDAQ:QCOM), Xilinx (NASDAQ:XLNX), and Broadcom (NASDAQ:AVGO) told employees they won’t supply Huawei until further notice. Shares of those companies were down between 2% and 5% in pre-market trading this morning.
The news comes after tensions with China ratcheted up last week after President Trump signed an executive order saying U.S. firms can’t use telecom equipment from companies that pose a national security risk, a move broadly seen as targeting Huawei. And the Commerce Department added Huawei to a list requiring the company to get government approval to acquire components and technology from U.S. firms.
The Huawei fallout creates a wild card that that market isn’t loving as it seems like Trump’s blacklisting of the company is beyond a bargaining chip in the wider trade war. It seems likely that any deal that might get struck won’t come soon, like many in the market had been thinking.
This morning’s stock market action comes after CNBC reported late in the trading session on Friday that trade talks between the United States and China have stalled. The news comes after the United States raised tariffs on $200 billion of Chinese goods, and China, in retaliation, announced increased tariffs on U.S. goods that are scheduled to start in June.
Still, swings in the market seem to be getting smaller, perhaps a sign that the new normal of prolonged uncertainty about a trade deal between the world’s two biggest economies has generally been priced into the market.
It could also mean that investors are getting tariffed out. That fatigue could be a double-edged sword as on the one hand market participants may be paying more attention to company fundamentals, such as earnings. But, on the other hand, not paying enough attention to a big issue like the trade war could lead the market to get taken by surprise, which tends to be negative for stocks.
Data and Earnings Week for Homebuilding and Retail
Looking ahead, the economic calendar is relatively light this week. But there are still some data on tap during the week that will likely be of interest to investors and traders.
Existing home sales for April are due out on Tuesday, while new home sales data for the month are scheduled for Thursday. And durable goods orders for April are on the calendar for Friday.
Fed minutes are also scheduled for release this week, and investors may want to parse through them to try to glean more insight into the central bank’s thoughts on the economy.
While earnings season is almost over, this week still has plenty to offer in terms of corporate reports.
A bevy of clothing and footwear retailers is expected to report earnings this week, including J.C. Penney (JCP), Kohl’s (KSS), TJX Companies (NYSE:TJX), Nordstrom (NYSE:JWN), L Brands (NYSE:LB), Ross Stores (NASDAQ:ROST), and Foot Locker (NYSE:FL). (See more on retailers below.)
Those companies fall under the Consumer Discretionary sector. So their results and comments from their executives could help paint a clearer pictures of what kind of mood the U.S. shopper is in. It could also shed more light into the shift from traditional brick-and-mortar business to online retailers and let us know how some of these companies are competing with Amazon (NASDAQ:AMZN).
Home Depot (NYSE:HD), Lowe’s (NYSE:LOW), and Toll Brothers (TOL) are also expected to report, and these businesses could give us a glimpse into the housing market in addition to the existing and new home sales data.
Meanwhile, Target (NYSE:TGT) is also expected to report earnings this week. While you can certainly shop for clothes at Target stores, the company also sells a host of goods that put it in the Consumer Staples category. This slightly different sector of the economy tends to be viewed as a defensive play because companies in it can often still do well even in an economic downturn because people need their household goods regardless of how the economy is doing.
Figure 1: Gold Dulls: Gold prices (candlestick chart) retreated on Friday as strong consumer sentiment data (see below) boosted the U.S. dollar (line chart). A stronger dollar can dampen demand for dollar-denominated gold by making it more expensive for buyers holding other currencies. The U.S.-China trade tensions have also been helping the dollar. Data Source: Chart source: The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.
Consumer Sentiment: On Friday, trade tensions outweighed some positive U.S. economic data. The University of Michigan’s consumer sentiment index for early May came in at 102.4, well above the 96.9 expected in a Briefing.com consensus estimate. That was the highest reading in 15 years. “Consumers viewed prospects for the overall economy much more favorably, with the economic outlook for the near and longer term reaching their highest levels since 2004,” the university said. However, the increase in the index was mostly recorded before the U.S.-China trade talks collapsed and China responded by announcing its own increased tariffs. We’ll have to wait until May 31 for the release of final May data to see if the developments have weighed on consumer sentiment.
Retailers and Tariffs: The same University of Michigan report also noted that even aside from the direct impact that tariffs have on prices, increased tariffs “could cause a more general loss of confidence which could further diminish the pace of consumer spending.” Goldman Sachs (NYSE:GS) analysts said recently in a note that U.S businesses and households have born the entirety of the costs of tariffs. And a Walmart (NYSE:WMT) executive said rising tariffs will make goods more expensive for shoppers, while a Macy’s (M) executive warned that another round of U.S. tariff hikes would impact apparel and accessories categories. If Trump does impose tariffs on a $300 billion swath of goods, as he has threatened, that round of duties would cover clothing, shoes and other consumer items. This comes at a time when brick-and-mortar retailers are already getting squeezed by AMZN, and it remains to be seen how much of the increased costs these businesses would be able to pass on to their consumers. With the threat of the pain getting spread around, it may be worth listening in this week to see if more retail executives discuss the tariff issue.
Japan’s GDP Surprise: In a counterpoint to the doom-and-gloom investors have been worrying about with the world’s two largest economies, its third largest appears to be doing surprisingly well. Japan’s gross domestic product rose at an annual rate of 2.1% in the first quarter. That handily beat the median estimate of a contraction of 0.2% expected in a Reuters poll. Still, the surprise surge may not worth getting really excited about. It comes as imports fell faster than exports, which isn’t a good sign for domestic demand. It’s also not a great sign for exports; it just happens that they didn’t fall as much as imports.
Disclaimer: Charts For illustrative purposes only. Past performance does not guarantee future results.TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.