Trade Fade.

Trade fade.  Last week’s chaotic week of trade was capped off by an upbeat employment number, though any hopes of rally were quickly dashed by President Trump who said that additional trade sanctions on China may be needed.  So the fear trade crept back into the markets last week, albeit with less punch than previously.  As mentioned here before, investors are reacting with less and less vigor to the trade rhetoric and even the enactment of sanctions.  Investors need to sort out what is real and what is just bluster.  To be clear, there is plenty of bluster, which should not impact the value of stocks.  What should be watched more carefully are the subtle, but very real, sanctions that are slowly being switched on. When observing the top line economic numbers, there doesn’t yet appear to be any real drag on the US economy, although there have been some warning signs on the less-followed metrics.  The problems will occur once the GDP shows any markable slowdown (which it clearly hasn’t yet) or corporate earnings begin to reflect rising manufacturing costs – and that is coming.  One of the most critical responsibilities of a public company c-suite is to manage expectations of investors and analysts.  A CEO cannot simply call up an analyst and discuss specifics of upcoming earnings but they can subtly signal, through other indirect avenues, about the robustness of future earnings – and the best ones do.  What do I mean by all of this?  Investors and analysts are very interested in actual corporate earnings, as they should be, but what really causes shakeups in stocks are surprises.  Investors don’t like surprises, especially negative ones, so corporate leaders send messages to the market in order to lessen the blow when softer earnings actually come out.  An example of this signaling is something as understated as Apple making public a letter sent to the US Trade representative warning that tariffs “can” impact the prices of their products (this weekend).  This is a hint that Apple may be feeling some heat on costs as a result of the trade war.  This hint will certainly be picked up by analysts who cover Apple, and you can rest assured that their revenue models will be checked and re-checked this week as a result. I am emphasizing this point now because more and more of these subdued hints are flying quickly across the tape, possibly unnoticed.  Once we actually witness some impacts on earnings, then we will feel the real heat.  Now is the time to pay close attention to companies who can be impacted by international trade and holders of individual stocks and credits should take note.  Diversification is prudent – not just across multiple stocks, but also sectors, industries, and asset classes.

Markets were soft on Friday as the tech wreck continued through the session.  The Dow Jones, which was relatively buoyant earlier in the week was under the most amount of pressure on Friday.  That is because, as I have been emphasizing, the Industrials are the best index proxy for trade fears… and there was plenty of that on Friday.  All of the S&P500, Dow Jones Industrials, the Russell 2000, and the NASDAQ 100 are in their respective neutral zones but are all still constructive.  They will take their cues from the abundance of economic releases of the week ahead which includes consumer credit, small business optimism, producer price index, consumer price index, the Fed Beige book, industrial production, and the U of Mich. Sentiment to name a few (see attached economic and earnings release calendars).  These numbers are guaranteed to inject volatility into stocks in the week ahead.  Bonds will not be able to sit this round out as the economic numbers will certainly give insight into Fed policy as well.  Bonds had an interesting week last week, with the entire yield curve shifting upward led by the longer maturities (see chart 17 in my attached daily chartbook).  Additionally, spreads on high yield bonds widened a bit last week after a period of relative calm possibly indicating a risk-off sentiment creeping in (see bottom panel in chart 17 in my attached daily chartbook).  Economic releases are not the only factors which will impact bonds in the week ahead.  The Treasury is set to auction $73 billion in 3, 10, and 30 year maturities, which is the second largest supply since 2010 (more on that and debt bubbles in a future post).  Ten year yields closed on their 2.94% Fibonacci line on Friday and are approaching the important 3% threshold once again.  They will start the session around 2.93% and the 2/10 yield curve remains at 23 basis points.  Index futures point to a positive open this morning after trading up in Europe overnight.  Trade will be just one factor in a week chock-full of economic data and Elon Musk’s publicist will hopefully get a well-deserved break as Trump will spend the week dueling with Bob Woodward over the release of his new book.

daily chartbook 2018-09-10

earnings releases 9_10

econ numbers 9_10