(Wednesday Market Open) There’s geopolitics, and then there’s the conventional kind.
The impeachment situation puts focus back on the home front, but also raises questions about the big picture. Most importantly, could the turmoil in Washington potentially interfere with progress on a trade deal? That’s what the market is wrestling with, and one reason why stocks might have fallen yesterday and have a negative tone to start the day Wednesday.
Even though impeachment doesn’t directly affect trade negotiations, it’s definitely a distraction. The question is whether it might weaken the U.S. negotiating position with China.
Impeachment tends to take a long time, and Congress goes on a two-week break starting Friday. It’s a sideline drama, and what matters is trade. President Trump’s speech yesterday highlighted the trade concerns, and might have had a bigger negative impact on stocks than the impeachment drama.
We’ve heard it over and over: The markets hate uncertainty. Well, it’s hard to imagine anything more uncertain than an impeachment scenario, especially as trade talks loom. The last time there was an impeachment process—at the end of 1998 with President Clinton— stocks took a hit, though an overseas economic crisis might have shared some of the blame.
This time, the whole thing is likely to play out on Twitter (NYSE:TWTR), and in sync with trade talks beginning in a few weeks. The headlines and tweets could keep things jittery for a while, something we saw Tuesday as the Cboe Volatility Index (VIX) shot up above 17 from around 14 earlier this month. The 20-mark for VIX remains a key point to watch if you’re keeping score at home. It’s at 17.5 this morning.
The impeachment saga could make new headlines today if the phone conversation transcript between President Trump and Ukraine’s president is released. The White House is planning to turn over the whistleblower report to Congress by the end of this week. Normally, these wouldn’t be things to talk about in a non-political column like this one, but there’s a chance either or both of these events could have an impact on the market. Like it or not, it’s prudent to pay attention.
Old Home Week As “Defensives” Feel The Love
It was like old times yesterday, if August can be considered way back when. Many investors seemed to be taking a more “defensive” stance, with bonds getting a bid along with gold. The more aggressive Energy, Financial, and Technology sectors all got slammed. FAANGs were back on their heels, too. Utilities, which some veteran investors see as maybe the ultimate “defensive” sector and a bond proxy, rose more than 1%. Earlier this month it looked like people were unwinding some of their long-Utilities positions.This so-called “run to safety,” (though no investment is really “safe,”) could be partly explained by impeachment proceedings getting underway, but it wasn’t just impeachment that helped inject political pressure on the market. President Trump’s speech at the United Nations sounded hawkish on trade, and that might have factored into the negativity. His speech was a little bit of the hardline side, and what it helps show is that when nothing is known (in this case about how the coming trade talks might develop) the smallest thing can set the market off.
Currencies In Spotlight
While the Washington and presidential speech turmoil apparently added to the buying in gold and bonds Tuesday, it wasn’t just that. We also had news out of the U.K. (the suspension of Parliament being ruled unlawful) that brought Brexit back into focus and raised worries about the British pound. That currency had been rising vs. the dollar.
The euro, on the other hand, has been pretty weak the last few months, and doesn’t show much sign of getting back up to fight. That said, the dollar lost ground, too, on Tuesday, on what analysts said was political risk as impeachment talk flared up. It’s interesting to see people pile into U.S. Treasuries even as they flee the dollar. Usually these are places people go when there’s fear, but investors seemed to divide their attention early this week. The dollar index remains pretty solid at above 98 even after Tuesday’s losses.
Consumer confidence for September came in well below expectations in the first major data point of the week. New home sales for August are the next data point, due this morning. Housing numbers have been getting better lately, so we’ll see if that trend continues. Lower mortgage rates seem to be working a little of their charm, but so does general consumer health.
Saving Best News For Last
Speaking of which, Nike (NYSE:NKE) delivered some positive tidings late Tuesday with its earnings. The stock is one of those names that’s closely associated with consumer strength, so seeing it outperform in its latest quarter might take some of the sting away from a couple other consumer-oriented companies like FedEx (NYSE:FDX) that didn’t have such good reports recently and raised concerns about shoppers. The NKE earnings could reinforce ideas that consumer health remains solid, and that there might not be reason to worry about the consumer at least until after the holidays.
NKE shares jumped 5% to all-time highs after yesterday’s close, as the company easily surpassed third-party estimates for earnings per share and revenue. One real eye-opener was a 27% jump in Greater China sales. It doesn’t look like the trade battle is really hurting NKE, at least this time around. The rally after hours helped NKE shares in their race vs. the SPX, where they’d been trailing so far this year. NKE had been up 17.5% year-to-date vs. 20% for the broader market.
In other corporate news, investors seem happy that Philip Morris (NYSE:PM) and Altria (NYSE:MO) have ended merger talks. Both stocks jumped in pre-market trading.
On the technical side of the market, the S&P 500 Index (SPX) had a rough start to the week, unable to hold above psychological resistance at 3000 that it crossed over briefly. It then turned much lower, with its weakest day in a month on Tuesday. Support might be down in the 2930-2940 range, an area of previous resistance that it broke through after some attempts earlier this month.
Small-caps represented in the Russell 2000 Index (RUT) also had a tough day on Tuesday, hurt in part by weakness in the many Energy and Financial names that call the RUT home.
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FIGURE 1: SAFETY PLAY? It looks like investors have gone back to caution over the last week, judging by this one-month chart of 10-year Treasury yields (TNX-candlestick) and gold (/GC-purple line). Yields are now well off their mid-September highs and gold has bounced back from recent lows, both possible signs that investors are seeking defensive assets as political and geopolitical events play out. Data Source: Cboe Global Markets, CME Group (NASDAQ:CME). The chart above shows the general trend, target support and resistance lines via a linear regression channel. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Turn Back the Clock: It’s been nearly three months—and a lot of ballgames and barbecues—since Q2 ended. Despite that, tomorrow means turning back the clock to the April 1-June 30 period and once again checking how gross domestic product (GDP) did last spring. It’s the third and final Q2 GDP estimate from the government before it starts delivering Q3 GDP estimates late next month. In the penultimate estimate for Q2, GDP grew 2% year-over-year, down from 2.1% in the advance estimate and down from 3.1% in Q1. Things aren’t likely to change much in tomorrow’s final estimate. Consensus among analysts, according to Briefing.com, is for a repeat of 2%. Barring a surprise in the final Q2 GDP, attention is turning toward what kind of Q3 growth we might see. If you’re hoping for an uptick, maybe reconsider. The Atlanta Fed’s GDP Now indicator predicts just 1.9% growth in Q3.
What GDP Could Tell Us About Inflation: Besides the headline number, which isn’t expected to be too exciting this time if analysts are right, there’s other information you can glean in tomorrow’s report. The GDP report can offer a sense of price growth if you check what’s known as the “GDP deflator." Some analysts say the GDP deflator, which measures the difference between nominal and real GDP, is a better inflation indicator than the monthly Consumer Price Index (CPI), because the GDP deflator captures changes in prices related to production and income developments. Nominal GDP measures GDP at current prices, while real GDP is adjusted for inflation. In the last report, the GDP deflator was 2.4%, so consider keeping an eye on that for further insight into the price picture.
Also, with trade still front and center, some investors might look at the GDP report for a sense of how that’s affecting U.S. exports. The export market’s health or lack thereof does play into GDP, and last time out the government lowered the contribution to growth from net exports. You can also glean consumer health from the report, because it tracks consumer spending growth. That category was up nicely in the last estimate, so we’ll see if it stays that way.
On Retreat: The move back into bonds didn’t really begin Tuesday. It’s a retreat that’s been going on for a few days now, and 10-year yields are back down below 1.65% after climbing to 1.9% earlier this month. That’s still well above the recent lows below 1.5%, but it’s not exactly the kind of thing bullish investors would have necessarily wanted to see. If you’re watching that yield curve, the 10-year now has less than a 3-basis point lead over the two-year, bringing back the prospect of another potential inversion like we had over the summer. That conceivably could put more pressure on Financial sector stocks as their earnings potential gets compressed. Some economists think yield inversions can predict a slowing economy, but others say at current low yield levels it’s not so cut and dry.
Good Trading