Trade-Weary Investors Seek Earnings Clarity. Good Luck.

Mixed stock signals lead market commentary.

Trade-Weary Investors Seek Earnings Clarity. Good Luck.

Bullish? Bearish? Could be.

Photographer: GraphicaArtis/Hulton Archive/Getty Images

Photographer: GraphicaArtis/Hulton Archive/Getty Images

Equities have become slaves to the budding trade war between the U.S. and the rest of the world. Stocks seemingly rise or fall with every new headline, no matter how inconsequential. As such, investors probably can’t wait for the start of earnings season to get some clarity on where stocks go next.

Good luck with that. 

By all accounts, companies will report second-quarter results that will impress, gaining some 20 percent on average from a year earlier. The bulls say that’s a reflection of a good economy that is benefiting from the Trump administration’s business-friendly policies. The bears say the good times won’t last, as debt-laden consumers rein in their spending with real wages — or what they make after inflation — failing to advance.

Two announcements this week that largely flew under the radar give support to both arguments, suggesting the push-pull trend in stocks isn’t likely to end anytime soon. First, shares of Fastenal Co., which sells everything from nuts and bolts to welding equipment, saw its shares soar on Wednesday by the most since 2008 after the company posted better-than-expected sales data. With such a diverse product line tied to blue-collar industries, it’s hard to say Fastenal isn’t a reflection of the economy. But on the same day, Cedar Fair LP, which operates Midwest-centric theme parks, saw its shares tumble the most since 2009 as it reported disappointing attendance figures despite favorable weather. That’s not what one would expect given that unemployment is the lowest since 2000.

Where to Next?

The U.S. stock market meanders as traders await second-quarter earnings reports

Source: Bloomberg

At this point, not even Federal Reserve Chairman Jerome Powell seems to know how all this will play out. “The economy’s in a really good place,” Powell said Thursday in an interview on American Public Media’s “Marketplace” program. But should escalating trade disputes result in “high tariffs on a lot of products and a lot of traded goods and services” that “could be a negative for our economy,” he said. So much for clarity.

Don’t look for answers in the bond market, where traders seem to be equally confused on what lies ahead. That can be seen in this week’s debt auctions by the Treasury Department. Demand at Tuesday’s sale of three-year notes was the weakest since 2009, based on the amount of bids received. That’s a sign that perhaps traders see the economy — as Powell suggests — in a good place, keeping the Fed on track to continue raising interest rates gradually. But then demand at Wednesday’s auctions of 10-year notes came in above average, and then at Thursday’s sale of 30-year bonds, it was in line with the recent average. What about all those economists who at the start of the year were forecasting a bear market in bonds? They are staring to have some second thoughts. The latest monthly survey of economists and strategists by Bloomberg News released Thursday shows that they are starting to cut their forecasts for how high benchmark 10-year yields will get this year, to 3.15 percent from 3.20 percent in the June survey. While that’s still higher than the 2.85 percent 10-year Treasury yield on Thursday, the trend is working in favor of the bond bulls.

Bonds Are Stuck

Treasury yields settle into narrow range as traders absorb supply

Source: Bloomberg

The rout in the commodities market Wednesday that saw the Bloomberg Commodity Index tumble 2.70 percent in its biggest decline in three years came to abrupt halt on Thursday with the gauge recovering 0.68 percent. The sell-off Wednesday was blamed on everything from faceless computer programs to the worst drop in China’s offshore yuan since 2015. The latter makes some sense because a weaker yuan is reflective of a weaker Chinese economy, and China is the world’s biggest consumer of commodities. So, with the offshore yuan rebounding on Thursday, are commodities in the clear? Perhaps not, going by what’s happening in the oil market. The spread between December 2018 and December 2019 Brent crude futures — a favorite play for hedge funds — is the weakest in four months, suggesting traders anticipate more declines in oil prices, according to Bloomberg News’s Alex Longley. Besides the escalation of a trade war between the U.S. and China, the oil market has been rocked this week by the return of Libyan exports, which had been reduced by several hundred thousand barrels a day, and the suggestion that the U.S. may grant some waivers from sanctions to buyers of Iranian oil. Those headlines were enough to cause oil bulls to throw in the towel, at least temporarily, Longley reports. In another bearish sign, traders were demanding the biggest premium for put options over bullish calls in two weeks on Thursday, a reversal from earlier this week when call options were more expensive than puts.

Spread Slide

The Brent crude September-October spread drops to multi-month lows in bearish signal

Source: ICE Futures Europe

European Central Bank President Mario Draghi is widely credited with helping to avert a euro crisis when in 2012 he pledged to do "whatever it takes" to save the common currency. New Turkey Treasury and Finance Minister Berat Albayrak, which is President Recep Tayyip Erdogan’s son-in-law, had his own "whatever-it-takes” moment Thursday when he promised to do whatever market conditions require to stop his country plunging further into financial crisis. Traders aren’t so sure. The benchmark Borsa Istanbul 100 Index plunged 1.88 percent Thursday, the most of any major emerging market, and bringing its year-to-date decline to 22.3 percent. "Our policies will take shape based on the framework of stable and sustainable growth, with priority given to budget discipline, single-digit inflation and structural reforms,” Albayrak told the state-run Anadolu news agency. Foreign investors have fled Turkish markets, with the lira weakening almost 7 percent following the announcement of Turkey’s new government on Monday amid concern about what the new administration would mean for the central bank’s autonomy, according to Bloomberg News’s Onur Ant. Albayrak said the central bank will be more “active” than ever, and the government will assist it by coordinating fiscal and monetary policies.

Where's the Bottom?

Turkey is home to this year's worst-performing stock market

Source: Bloomberg

Across the Atlantic Ocean, investors are warming up to new Mexican President Andres Manuel Lopez Obrador, the leftist candidate who had spooked markets for months with his populist rhetoric. The peso has strengthened pretty consistently since AMLO, as he is called, was elected president on July 2, appreciating 5.20 percent to its highest level against the dollar since early May. The gain is the biggest among the world’s most actively traded currencies. Since the election, AMLO and his aides have worked to ease the concerns of business leaders and investors. His transition team, consisting mostly of college professors, hopped from interview to interview, stressing central bank independence, budget discipline and due process to determine the fate of Mexico City’s new airport project, which the president-elect had previously proposed should be halted, according to Bloomberg News’s George Lei. In another sign of confidence, the peso’s one-year implied volatility jumped above 14.5 percent to a five-month high in mid-June, but now trades in line with its 2018 average.

Getting Stronger

It takes fewer pesos to buy one dollar as confidence in new President rises

Source: Bloomberg

The University of Michigan will release its preliminary reading on consumer confidence for the month of July on Friday, and the consensus is that sentiment continues to hover around its highest levels since the early 2000s. But there are some interesting developments beyond the headline number, namely the wide gap between how consumers describe their current situations and how they see them in the future. Consumers are generally cautious, meaning that they typically expect conditions to deteriorate. But lately, they have become unusually pessimistic. The current conditions index last month exceeded the future conditions index by 30.2 points, which is well above the median of about 20 points going back to 1980, according to data compiled by Bloomberg. The question now is how the relationship normalizes. Will the current conditions portion drop toward the expected conditions index, which would be a bearish signal, or will consumers become more optimistic about the outlook?

Powell’s Fed Faces a New Question About Inflation: Tim Duy
Bond Traders Are Flummoxed by ’Slumpflation’: Brian Chappatta
Companies See Clearly Without GAAP in Their Eyes: Stephen Gandel
Greek Bond Officials Need to Say ‘Carpe Diem’: Marcus Ashworth
Trump’s Made Asia Junk Investors Nervous Nellies: Andy Mukherjee

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