Market Direction Week of October 7, 2019: More Stock Market Noise

Market Direction: BEARISH alert issued 10/3/2019



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Market Direction Week Review: Stocks declined for the third straight week while bonds rose, helping smooth out volatility for balanced portfolios. Cyclical sectors led the way on the downside as a string of disappointing U.S. economic data fueled worries that a slowdown in manufacturing will spread to other parts of the U.S. economy. The Purchasing Managers' Index showed that manufacturing activity contracted in September for the second month in a row. The services index also declined but remained in expansion territory. Topping off the data was September's jobs report, which provided some assurance that despite a slowdown in hiring, the labor market remains tight, a positive for consumers and the economy. We believe the mix of slowing economic data and geopolitical risks is likely to result in higher volatility, but fundamentals appear strong enough to remain constructive. 

Next week Thursday (10/10) and Friday (10/11), senior Chinese trade delegates will be in Washington DC again for their 13^th round of negotiations over the trade war which has now stretched to 500 days. While almost no one is expecting a full-blown new trade agreement, any progress or news from the US or China that negotiations are progressing, or a commitment from the US to postpone the next round of tariff increases scheduled to take effect on October 15^th, would likely be bullish for equity markets. President Trump continues to say he wants a new trade deal, but only if it is fair to the US.

Separately, the US won approval from the World Trade Organization (WTO) to impose tariffs on $8B in European imports as reparations for illegal state aid provided to Airbus (more details in the Europe section below).

Chinese negotiators have repeatedly stated that the new round of trade talks would result in a better outcome if both sides would "take more enthusiastic measures" to show goodwill and reduce "pessimistic language". Keep an eye on Twitter this week to see if President Trump honors this request.

Separately, in an effort to reduce recent escalations of violence, Hong Kong Chief Executive Carrie Lam imposed a ban on masks worn by protestors, and shut-down several rail lines. Recent clashes have resulted in a police shooting of an 18-year old protestor, critical injury of a 14-year old, and riots where plain-clothed police officers were attacked and injured. 

Impacted countries in Europe are working to respond to new US import tariffs that will be imposed on $8B of EU exports after the US won a decade-old complaint filed with World Trade Organization over EU subsidies provided to aircraft maker Airbus. The planned tariffs will impact not only Airbus, which was formed by Britain, France, Germany and Spain, but also such products as French and German wine, European cheeses, British suits, sweaters and pajamas, Scotch, Whiskey, Champagne, leather goods, and other luxury items. While suppliers are expected to absorb some of the costs, it is likely that higher prices will also be passed on to US consumers. 

This week in Brexit news, U.K. Prime Minister, Boris Johnson’s most recent Brexit proposal is likely to be rejected by the European Union which said that while it is open to discussions, it will likely require further concessions to avoid a no-deal Brexit. The primary sticking point remains the Irish-British border which the Irish Prime Minister Leo Varadkar says is key to any possible deal.

How the market finished last week, the S&P 500 down 0.3%, the Nasdaq up 0.5%, and the Dow down 0.9%.

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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 10/3/19 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).

While Consumer and Producer Price inflation reports are due next week, it’s the new trade talks that will likely garner the most attention. Chinese trade delegates will be in Washington on Thursday and Friday and with existing tariffs already scheduled to increase the following week, hopes for another postponement will be high on traders’ wish lists.

A couple of events will put the markets to the test this week. First, high-level trade negotiations between the U.S. and China are expected at the end of the week. Second, the Federal Reserve will be thrust into the spotlight. Several Federal Open Market Committee (FOMC) members are scheduled to speak, and meeting minutes from the FOMC’s September meeting will be released Wednesday.

Investors will be eagerly waiting to see if the the U.S. and China are able to make meaningful progress when negotiators meet in Washington Thursday. In an interview with Bloomberg TV, White House economic advisor Larry Kudlow said Friday that there could be “positive surprises” coming out of the talks.

Tensions have been running hot between the U.S. and China and additional U.S. tariffs are set to go into effect December 15. A lack of trade progress could send investors into a frenzy.

Meanwhile, Fed Chairman Jerome Powell is scheduled to speak on two separate occasions this week. On Tuesday, Powell will be in Denver, Colorado at the The 61st National Association for Business Economics (NABE) Annual Meeting. He will be discussing “Data Dependence in an Evolving Economy.” Wednesday, Powell will be at the Fed Listens: A Community Listening Session in Kansas City, Missouri. The FOMC will also release its September meeting minutes Wednesday afternoon

While the recent economic data has illustrated a contracting manufacturing sector and a weakening services sector, the consumer is still strong and the labor market is solid. While the Fed’s next policy move is unknown, what is known is that the FOMC members are divided. Regardless, Powell and the Fed will do whatever is necessary to sustain the expansion.

“The big question is whether Fed officials themselves have been as swayed as the markets by the incoming data?” Capital Economics said in a note Friday. “At that last meeting, five officials disagreed with the September rate cut, five others were not projecting any further cuts this year and, of the seven who were open to additional loosening this year, all of them anticipated only one more 25bp cut before year-end.”

The FOMC minutes should provide a clearer picture as to whether or not the central bank plans on cutting rates at its meeting at the end of this month and then again in December.

Economic Calendar: PPI (10/8), Wholesale Inventory (10/9), CPI (10/10), International Trade (10/11)

Some of the major earnings announcements on deck: DPZ, FAST, DAL, LEVI.

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