Adrift

Adrift.  Stocks drifted modestly higher yesterday as Chinese trade rhetoric eased and expectations for easy money rose.  Early session selling on EU trade troubles turned into buying in an uneventful day of trade.

MY TWO CENTS

1.  Reality check.  Traders have been laser-focused on the ups and downs of trade talks with China, allowing themselves to be manipulated by tweets and soundbites.  The fact is that both the US and China have suffered economically from the ongoing struggle, though you would't know it if you looked at the stock market, which is trading at or near all-time highs.  We can most likely thank the Fed for that.  In the wake of their Christmas pivot and increasingly dovish tilt, investors are all but certain that the Fed will lower rates at their next meeting.  Later this month, investors will have to deal with something else as well: earnings season.  According to Bloomberg, 82% of companies that have revised earnings leading up to this upcoming season have revised them downward.  Based on current estimates, earnings are expected to be flat to slightly higher for the second quarter.  Earnings will be the ultimate arbiter on the strength of ongoing a bull market.  We will be watching.

2.  Yield to the yield.  The world’s largest central banks seem to all be falling into line… a dovish line that is.  Yesterday, comments by the Bank of England and Bank of Japan made it clear that they were concerned with the weakening global economy, further increasing the potential for more monetary easing.  Christine Lagarde, currently the IMF Chief, will become the next ECB President and she is expected to strike a more dovish tone than her predecessor Mario Draghi.  Bonds traders weighed in as well pushing 10-year yields to lows not seen since 2016.

THE MARKETS

Stocks sold off early on escalating trade tensions between the US and the EU, as the office of the US Trade Representative announced that it would be adding an additional $4 billion worth of European imports to a list of possible items to be taxed.  The selling ultimately gave way to buying with the only real news of the day being dovish rhetoric from BOE Chief Mark Carney and the US Woman’s Soccer Team’s win over England’s Lionesses. Stocks closed modestly higher with the S&P 500 closing up by +0.29% at a new high, the Dow Jones Industrial Average trading up by +0.26%, the Russell 2000 slipping by -0.58%, and the NASDAQ 100 climbing by +0.41%.  Bonds rallied and 10-year yields fell by -5 basis points to 1.97% bringing the almost-forgotten inverted 3-month/10-year yield curve to -22 basis points.  Crude oil fell by -4.81% despite the OPEC+ supply cut agreement, as many analysts believe that demand will continue to wane.

WHAT’S NXT

- ADP Employment Change is expected to show +140k new jobs created compared to last month’s 27k.

- Markit Services PMI is expected to be at 50.7 down from last month’s 50.9.  ISM’s Non-manufacturing Index is expected to be 56.0, down from last month’s 56.9.

- Economists expect Factory Orders to have fallen by -0.6% compared to last month’s -0.8% drop.

- The final read on Durable Goods Orders is expected to show a -1.3% drop compared to last month’s -2.8% pullback.

- Stock markets will close at 1:00 PM today and reopen for a regular session on Friday morning.

Have a great holiday!

daily chartbook 2019-07-03