Digging in. In response to massive Chinese government jawboning over the weekend, Chinese equity markets shot up and dazzled like a firework but failed to win over US investors. All except the NASDAQ, which was the only one of the major indexes that managed to post a positive close in yesterday’s US session. With very little in the way of economic releases, investors focused on earnings and politics. On the earnings front, more and more earnings calls are beginning to discuss impacts of tariffs and interest rates, as expected. Though earnings have grown and continue to beat expectations, many analysts are beginning to wonder if we have reached what many refer to as “peak earnings” and “peak revenue”. As the names imply, the terms refer to the high water mark of earnings and revenue before a significant decline. It is no secret that the 2017 tax bill had a very positive impact on earnings throughout 2018. Many expect the boost from the tax cut to fizzle out by the end of this year and it has some investors worried a bit. Additionally, a rising interest rate environment is only relished by banks leaving all others with greater expenses. In the case of companies that rely on consumer credit, higher interest rates mean less revenues. In the world of international trade, though the Administration has made positive strides with our North American partners, an end to the trade war in China appears to show no sign of ending soon. It should be noted that President Trump is expected to meet with President Xi next month, which will hopefully yield some positive results. For now, tariffs and logistics slowdowns are beginning to find their way into earnings and future projections, which has investors rethinking investment strategies. Finally, as we are just about two weeks away from the mid-term elections, many investors are wondering what a potentially divided congress can mean for growth. If either or both houses fall to the Democrats, the legislative color will likely change and those companies which benefited from Republican legislation are being looked at closely. All of these headwinds are causing investors to step back and when investors step back, well you know, markets are soft.
Yesterday, the S&P 500 closed down on the day with a close below its 200 day moving average (chart 4 in my attached daily chartbook). The index bounced off of its round 2750 and will get some support from that level and below at its 2736 Fibonacci line. The Dow Jones Industrial Average closed down on its 25344 Fibonacci support line but above its 200 day moving average, which will serve as support for the index (see chart 6 in my attached daily chartbook). The small cap Russell 2000 index closed down, off of its lows of the session and continues to struggle to gain ground for any substantial recovery. The Russell will get support at its recent low at 1530 and its 1508 Fibonacci retracement line (see chart 7 in my attached daily chartbook). The NASDAQ 100 managed a positive close yesterday following on the Chinese market rally. The NASDAQ remains above its 200 day moving average and will receive support from the average as well as its 7078 Fibonacci line (see chart 8 in my attached daily chartbook). All of the S&P, Dow, R2K, and NASDAQ remain risk off. Bonds also traded down in yesterday’s session bringing yields up slightly as ten year yields spent a good part of the session over 3.20%. Bonds traded up in the overnight session as equities sold off in Asia pushing 10 year yields down to 2.14%.
Today will be another light economic release day with only the regional Richmond fed manufacturing index expected to come in at 24 after last month’s 29. All eyes will be back on earnings as we will get a good number of them before the bell and, as I have been saying, simply beating estimates is not enough to satisfy investors so speculating on investor responses will be difficult. For more information on earnings, please refer to the weekly earnings release calendar I posted yesterday. As mentioned above, equity futures have traded off overseas so we will most likely have a soft open if the pre-market earnings releases can’t wow investors. The VIX index will start this mornings session at 23 up from yesterday’s 20 – another indicator of a potentially tough open. Today’s news cycle will contain lots of talk about China, Saudi Arabia, and Italy. Yes Italy, whose proposed budget to the EU may be denied today which will also add some additional volatility to the session ahead.