Counter Attack!

Counter attack!  Stocks were hit with a one-two punch yesterday as China fought back in the war of words and traders started to heed the warnings of the bond market.  Stocks spent the day under water as trade jitters and recession fears ruled the session.

 

MY TWO CENTS

 

1.  The fight is getting real! A steady stream of fighting words came from China via its carefully controlled media in the past few days.  Last week President Xi visited a rare earth element production facility and kicked off speculation that China might limit US access to the materials as part of the ongoing trade war.  China is the world leader in mining and production of rare earth metals which are used in everything from consumer electronics such as smart phones to military equipment such as smart bombs.  Speculation was heightened yesterday as the Chinese press used lines like “…you were warned”,  a term which has been used by the Chinese Government in earlier spats which ultimately led to significant conflicts with other nations.  WHILE YOU SLEPT, a Chinese Ministry of Commerce spokesman said that he hoped that the US would correct its bad practices and that China would not accept its rare earth elements being used against itself.

 

2.  Negative Nellie bond traders are starting to be noticed. It is well known to insiders that bond traders are considered to be the wiser of the investors due to their reliance on economic data, the functionality of fixed income securities, and the profile of bond investors.  It is due to these attributes that bonds often provide early warnings when trouble may be on the horizon.  More speculative stock traders have been ignoring the warning signs of the bond markets since ten-year treasury yields began to fall in earnest after peeking at 3.23% last November.  Bond traders began to price in the increased probability of recession which caused the yield curve, as measured by the spread between 3-month T Bills and 10-year Notes, to flatten.  The flattening effect sped up after the Fed announced that it would change its policy to a more dovish stance in response to global economic headwinds, fearing that further hikes might push the US economy into a recession.  The yield curve inverted for a 5 day period in March of this year and got a lot of press because an inversion is a predictor of recessions based on history.  Historically, if an inversion lasts for 10 days or more, the likelihood of a recession within the two years that follow the inversion increases significantly.  In yesterday’s session the yield curve inverted to its lowest level since 2007 making it the 7th day in a row for this inversion.  Stock traders are starting to pay attention.

 

THE MARKETS

 

Stocks closed down but well above session lows as trade jitters, fears of recession, and some technical warnings spooked equity investors.  The treasury yield curve inversion was top of mind as the curve inverted by as much as -14 basis points before closing at -9 basis points.  The ten-year treasury fell pushing yields as low as 2.2% intraday only to close unchanged at 2.26%.  Ten-year treasury yields are at their lowest point since September, 2017.  Stocks started the day under pressure and the pressure increased when the S&P500 fell below its 200 day moving average (a negative warning sign) but ultimately closed right on it.  The S&P500 traded down by -0.69%, the Dow Jones Industrial Average fell by -0.87%, the Russell 2000 dropped by -0.94%, and the NASDAQ 100 sold off by -0.85%.

 

WHAT’S NXT

 

– The Bureau of Economic Analysis’ second estimate of first quarter GDP is expected to be revised down to +3.0% growth from the prior estimate of +3.2%.

– Personal Consumption is expected to have grown at +1.2% in line with the prior estimate.

– The National Association of Realtors are expected to announce that Pending Home Sales rose by +0.5% month over month, down from the prior month’s figure of +3.8%.

– Fed Vice Chairman Richard Clarida will speak in New York and he will surely be pressed on the latest yield curve inversion and trade war developments.

– Burlington, Dollar General, Ulta, and Dollar Tree report earnings before the bell.  After the bell earnings will include Gap, Costco, Dell, Uber Technologies (its first report since going public), Williams Sonoma, and Marvell Technologies.

daily chartbook 2019-05-30