Cboe Global Markets : Strong Data On Chinese Private Sector Add To Solid Manufacturing Numbers

Strong Data On Chinese Private Sector Add To Solid Manufacturing Numbers

JJ Kinahan 4/3/2019 9:24:01 AM

Optimism about a trade deal between the U.S. and China has ebbed and flowed in recent months. Today, it seems to be swelling, and in this case a rising tide lifts all freighters.

With talks between the world's two largest economies continuing in Washington this week, hopes seemed high after a Financial Times report quoted Myron Brilliant, executive vice president for international affairs at the U.S. Chamber of Commerce, that a deal is 90% done. Also, White House economic adviser Larry Kudlow said on Tuesday that the two sides 'expect to make more headway,' Reuters reported.

But before anyone gets too excited, Brilliant also said the last 10% is the hardest part. So, while things seem to have taken a nice step in the right direction, the devil is in the details, which Wall Street hasn't seen yet.

An index that showed gains in China's private sector also appears to be helping sentiment this morning, coming on the heels of solid manufacturing data from the Asian nation as well as the United States, which helped boost stocks on Monday.

Taking a Breather

If Monday's strong U.S. stock performance was like a blowout basketball win, yesterday's performance was like going for a layup or maybe just running out the clock.

The S&P 500 (SPX) was essentially unchanged near its highest levels since October while the Nasdaq (COMP) was up a touch and the Dow Jones Industrial Average ($DJI) fell a smidge. It seemed market participants wanted to take a breather following one of the best Wall Street performances of the year, with all the major indices up 1% or more and the SPX nearing a six-month high Monday.

The small nature of the moves in the major U.S. indices Tuesday seemed to indicate that there wasn't too much profit-taking going on. There also wasn't much follow-through buying from Monday, but that didn't seem to be because of too much anxiety in the market as Wall Street's main fear gauge, the Cboe Volatility Index (VIX), dipped for the fourth session in a row. It may be that investors and traders could be keeping their powder dry ahead of Friday's jobs report.

A (Small) Flight to Perceived Safety

Still, sobering U.S. durable goods data combined with news that Britain's prime minister said she would seek a longer extension from the European Union to keep the market on its toes Tuesday. The deadline of April 12 is approaching, and British legislators have still not hammered out a deal to exit from the currency bloc.

The Brexit confusion has been an overhang to markets, as have unresolved negotiations between China and the United States on a deal to end the trade war between the world's two largest economies.

So it seems Tuesday's news from across the pond served as a reminder that the global economy isn't out of the woods yet, despite upbeat manufacturing data from the U.S. and China on Monday.

Demand for U.S government debt, considered a safe haven investment, rose on Tuesday, pushing the yield on the benchmark 10-year Treasury note lower (see figure 1 below). But it remained above the yield on the three-month Treasury bill, which also fell Tuesday.

Gold, also considered a safe-haven investment, rose slightly on Tuesday, despite gains in the U.S. dollar. The two often move inversely to one another as a stronger dollar makes dollar-denominated gold more expensive for those using other currencies. But as both are considered safe haven investments, worry about geopolitical events can increase demand for both at the same time.

Downbeat Data, Drug Stores

Part of the problem for U.S. stocks Tuesday came from a downbeat report from Walgreens Boots Alliance Inc (NASDAQ: WBA). The $DJI component missed third-party consensus earnings per share estimates, cut its 2019 outlook, and drew attention to 'consumer pressures' in the United States and United Kingdom along with falling generic drug prices.

WBA shares dropped more than 12.8% while competing drugstore chains CVS Health Corp (NYSE: CVS) fell 3.8% and Rite Aid (NYSE: RAD) dropped nearly 9%, with all three hitting 52-week lows.

Strong economic data on U.S. and China manufacturing sectors and construction spending in the U.S. that helped the market rally Monday met headwinds on Tuesday. Durable goods orders for February fell 1.6%, a greater decline than a Briefing.com consensus had expected, and January orders got revised downward.

It's notable that a 4.8% decline in transportation orders helped pressure the headline figure for February, which was before the March 10 Ethiopian Airlines crash that resulted in the worldwide grounding of 737 Max jets made by Boeing Co (NYSE: BA) and clouded the future for orders of the plane. Even when not taking aircraft into account, non-defense capital goods orders fell by 0.1%

FIGURE 1: TEN YEAR YIELD UPTICK. After a slide lasting several weeks, the yield on the 10-year Treasury (TNX) has stabilized, with the yield now higher than that of the 3-month. Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

What April Showers?: April historically tends to be a pretty good month for stocks, but it remains to be seen whether this month will continue the trend. According to LPL Financial in a Monday note, April has been the best month of the year for the SPX over the past two decades, gaining 1.7% on average. And when the first three months of the year have been positive, April has closed up 15 out of 19 years since 1950, LPL said. The average gain in April for those 15 years was 2.6%. 'It's hard to say what has caused positive seasonality at this point in the year,' the note said. 'Investors could be heaving a sigh of relief after a typically volatile first quarter, managers could be squaring up portfolios at the start of a new quarter, or the advent of spring and warmer weather could just lighten up everybody's moods.'

Blustery Spring: But, history doesn't always repeat itself. As we're entering a new earnings season this month, S&P Capital IQ consensus estimates are pointing to a 2.4% year-over-year drop in Q1 earnings per share for the S&P 500, according to a Monday note from investment research firm CFRA. Also, Q1 isn't looking too good on an economic basis either, with Action Economics forecasting GDP growth of just 1.5% during the quarter, CFRA said. 'Higher stock prices may be tougher to achieve this April,' adds the LPL note. 'U.S. stocks just capped a strong rally after a near bear market to end 2018, and a weaker corporate outlook, recession worries, and global headwinds could inhibit markets in the short term.'

Dow and the Dow: If you're sharp eyed, you may have noticed a change to the $DJI yesterday. Dow Inc. (DOW) shares replaced those of DowDuPont Inc (NYSE: DWDP) as a result of the former being spun off as the materials science division from parent DWDP, which itself was created from the merger between Dow and DuPont. Shares of DOW did well on their opening day, rising more than 5%.

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