The Waiting Game

The waiting game.  Investors sat on their hands in yesterday’s session with no economic or fundamental news to trade on.  The waiting game began yesterday as investors await the start of earnings season later this week.

WHAT YOU NEED TO KNOW:

1)  The EU is now in the Administration’s crosshairs.  WHILE YOU SLEPT the US announced that it will levy tariffs on $11 billion in EU imports in response to their subsidizing Airbus.  The move comes on the eve of US - EU discussions regarding industrial tariffs.  Perhaps the negotiators feel that they need a threat as a bargaining chip, similar to the tariffs employed in the US China trade war.  Lest we forget that the Chinese trade war, which began last year did not help US equity markets.  To provide a bit of perspective, the impact on US businesses would not be as severe, however counter tariffs on US exports could take a toll.

2)  Brexit… the saga continues.  PM Theresa May is heading to the interior of Europe to meet with Merkel and Macron to ask for a longer extension to work things out back home.  If successful, Brextension, as it is now jokingly referred to, will come at some price.  Mrs. May, as she is referred to in the House, is now in row with some of her own party members over her working with the opposition to find a deal.   Markets have STILL not figured out quite how to handicap the risk of a Brexit scenario.

3)  Crude oil continues to climb… and that might not be such a good thing.  WTI has risen by some 47% since hitting a low $43.64 on December 24th.  Aggressive supply cuts by OPEC and increased demand are the primary reasons.  While the rise in crude is good for producers and the broader energy sector, it is bad for inflation.  Crude is a big contributor to inflation which is why President Trump includes OPEC in his cycle of things to put pressure on.  He frequently calls out OPEC beseeching them to lower the price of oil.  You know what happens if inflation starts to inch up again, and that is not good for stocks or bonds.  See chart 11 in my attached daily chartbook.

THE MARKETS

Yesterday, the equity markets did not have much in way of news on either trade or monetary policy so they followed the path of least resistance, which is up.  Later this week earnings announcements officially begin and traders have now set their sites on earnings for confirmation of the first quarter's epic move in equities. While some analysts expect earnings to actually recede as a whole, investors have been a bit more optimistic.  If earnings are not expected to grow and prices of stocks go up, the move in prices is due to multiple expansion which means investors are simply paying more for the same or less earnings per share.  Yesterday, the Dow Jones Industrial Average was held back by analyst downgrades of GE and Boeing and it fell by -0.32% while the S&P500 traded up by +0.1%, the RUSSELL 2000 slid by -0.22%, and the NASDAQ 100 climbed by +0.28%.  Bonds pulled back slightly and the 10 year treasury yield rose by +3 basis to yield 2.52%.  The move in 10 year notes combined with strong demand for the 3 month bill auction helped the 3 month / 10 year yield curve steepen a bit to +10 basis points, making that the seventh consecutive day in the positive.

WHAT TO LOOK FOR TODAY:

This morning the Bureau of Labor Statistics will announce its Job Openings by Industry, which is known as the JOLTS report.  The release is expected to show that there were 7,550,000 job openings in February versus 7,581,000 in the prior month, still around record levels.  The Fed’s Quarles and Clarida will speak today and speeches will be carefully watched in light of recent market moves and data.  The Treasury will auction off $38 billion 3-year notes today which will be watched closely by bond traders, as shorter maturities serve as a direct bet on future Fed policy.  Finally, the International Monetary Fund will release its World Economic Output report, which will likely show ongoing headwinds for global economic growth.

daily chartbook 2019-04-09