Market Direction: BEARISH alert issued 8/14/2019
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Market Direction Week Review: Stocks
were on track to finish higher for the week until China unveiled a new round of
retaliatory tariffs and President Trump vowed to respond, unnerving markets. In
this new episode of escalation in trade tensions, China announced that it will
impose tariffs ranging from 5% to 10% on $75 billion U.S. goods in two batches,
effective on Sept. 1 and Dec. 15, including a 25% tariff on U.S. cars. At the
annual central bank summit in Jackson Hole, Fed Chair Powell left the door open
for another rate cut when the committee meets next month, acknowledging the
risks to global and U.S. growth from trade uncertainty. While the Fed and trade
dominate the headlines, it should not be lost that economic and corporate data
remain fairly positive. Earnings from several high-profile retailers last week
were solid, indicating that the consumer - the main driver of the U.S. economic
engine - remains in good shape.
Last
week President Trump announced that the U.S. will delay applying additional
tariffs on some Chinese imports until December 15. While the exempted
items include Cell phones, video game consoles, toys and some footwear, other
items such as clothing, groceries, diapers, soap, and sporting goods will be
taxed beginning September 1st. Some analysts estimate that the new tariffs
could increase Christmas shopping costs by an average of about $1000 per
household; 40% more than the estimate provided when the May tariffs were added.
And of course a fixed price increase always impacts lower income households the
most, since it represents a larger portion of overall expenses. Since current
store inventories will be replaced with more expensive inventories post-tariff,
the uptick we’ve already seen in retail sales and consumer spending is likely
to continue for at least the next month.
Separately
on Friday (8/23) President Trump’s tweets sent equities into a late morning
nosedive when he escalated his attacks on Jay Powell and China, and said he was
ordering all package carriers to halt all shipments of Fentanyl from China.
Following these tweets the SPX dropped about -1.8% in only 10 minutes.
As
protests in Hong Kong continue, employees of US businesses with Hong Kong
offices, are being asked to lay low. This seems like a wise course of action as
Hong Kong based Cathay Pacific Airlines, has been under fire recently from the
Chinese government for publicly supporting the Hong Kong protests, resulting in
the ouster of CEO, Rupert Hogg and the resignation of 3 pilots. Apparently Hogg
had been asked by Chinese aviation officials to supply a list of names of
Cathay employees who had participated in the protests. News reports say Hogg
resigned after submitting a list on which he had written only his own
name.
Separately,
responding to the aforementioned tariffs due to take effect on September 1st,
China announced on Friday (8/23) that it would levy retaliatory tariffs on $75B
of U.S. imports. While this move should not have surprised anyone, premarket
equity futures immediately dropped -1.0% on the news.
This
week in Brexit news, U.K. Prime Minister, Boris Johnson, met on Thursday (8/22)
with French President, Emmanuel Macron to discuss the critical Brexit issue
known as the Irish backstop, which prohibits a hard border between Ireland and
Northern Ireland. The backstop would allow Northern Ireland to remain linked to
the European Union, in the event of a hard Brexit. Johnson opposes the backstop
because he sees it leading to a no-deal (hard) Brexit. By contrast, Macron
describes the backstop, which was negotiated by former Prime Minister Theresa
May, as non-negotiable. Yet despite this stumbling block, Macron expressed
confidence that a solution that all sides could support, could be found within
the next 30 days.
How
the market finished last week, the S&P 500 down 1.4%, the Nasdaq down 1.8%,
and the Dow down 1.0%.
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Market Direction This Week: We track the stock
market based on our Bullish and Bearish Alerts a new Bearish Alert
recently started on 8/14/19 and we suggested to our followers not to trade any
new long positions. We will continue to provide you the current stock market
conditions as they develop. The current stock market environment is in a correction
trade with caution (see Market Direction Mid Week Update: Trading Strategies).
With earnings season over and the economic calendar relatively light, it’s safe to say that government by Twitter will continue to be the main driver of markets again next week.
With earnings season over and the economic calendar relatively light, it’s safe to say that government by Twitter will continue to be the main driver of markets again next week.
The announced tariffs illustrates the speed at which the trade war is now escalating and there is no way of knowing where it will end,” Paul Ashworth, chief U.S. economist for Capital Economics, said in a note. “It is fears about where the trade war is going that will now weigh even more heavily on financial markets and business investment in the coming months – and that is where the real damage to the US economy will be done.”
Investors will be monitoring the
trade situation, and piecing together new U.S. economic data releases for signs
of whether this trade sparring has weakened some of the last bastions of
strength in the domestic economy.
Recent data has highlighted a
bifurcation in the U.S. economy as the trade-sensitive manufacturing sector
softened, while the consumer-led service sector held up more strongly.
“The next batch
of activity data for July are likely to highlight the divergence between the
struggling manufacturing sector and resilient consumers, with core durable
goods orders dropping back but real consumption rising at a solid pace,” Andrew
Hunter, senior U.S. economist for Capital Economics, wrote in a note Friday.
Manufacturing activity indices from
the Dallas and Richmond Federal Reserves are both expected to show negative
readings again for August, albeit slightly less so than from July. These
surveys come on the heels of a report from IHS Markit last
week showing U.S. manufacturing activity slid into contractionary territory in
August, reaching the lowest level in nearly a decade.
Moreover, orders for durable goods,
or manufactured products intended to last at least three years, are expected to
have risen at a slower pace in July from June, according to consensus
economists. And non-defense capital goods orders, excluding aircraft, are
expected to have been flat in July. These orders are widely seen as a proxy for
future business investment. Data on durable goods and capital goods orders are
set for release Monday.
Economists have widely pointed out
that the trade uncertainty has muddied visibility for businesses, making it
difficult for them to commit to capital projects and make plans to build out
their operations.
But the consumer has remained a
stronger part of the U.S. economy, as evidenced by July’s estimates-beating
retail sales figures, as well as better-than-expected results from retailers
including Target (TGT) and Walmart (WMT) this earnings season.
Economists expect that the second
print on second-quarter U.S. gross domestic product – which is set for release
Thursday – will affirm this stance. The first print showed growth of 2.1% in the second-quarter, beating expectations.
This had been driven by much better-than-expected personal consumption
expenditures (PCE), which grew 4.3%, or the most in six quarters.
Economic
Calendar: Durable Goods (8/26), Case-Schiller Home Price Index (8/27), GDP (8/29),
Chicago PMI (8/30)
Some of the major earnings announcements on deck: VEEV, TIF, FIVE, DLTR, BURL.
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