Over the past year, if you heard the words, “overseas woes pressuring markets,” your eyes might look across the Pacific, to see what shoe might have dropped in trade tensions between the U.S. and China. The same can be said for the early days of the coronavirus, which hit economies in the Pacific Rim before it spread across Western economies.
But not today. Today we look across the Atlantic to see bad news on two fronts. First, COVID-19 case counts have risen across Europe, leading to new measures in places like France, which just announced a curfew in Paris and other cities. In Germany, Chancellor Angela Merkel announced new measures as well, to slow spiking infection counts. The German DAX fell nearly 3% and the 10-year Bund fell to -0.62%—its lowest level since the depths of the outbreak in March.
Also emanating from Europe: FAANG members Facebook Inc (NASDAQ: FB), Amazon.com Inc (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) and Apple Inc (NASDAQ: AAPL) find themselves under pressure this morning amid a fresh call from the European Union to take action to curb the growing power of big tech firms, including the possibility of a forced breakup.
Risk-Off Sentiment Continues
The jitters from across the pond compound domestic worries about a federal coronavirus aid package that have helped lead stocks lower for two days in a row and look like they could contribute to a third day of declines.
If you’ll recall, last week’s rally was built around stimulus hopes. With that optimism waning, we’re seeing money come out of equities.
A risk-off day appears to be in the offing as investor concerns about the pace of the economic recovery seem to mount. The Cboe Volatility Index (VIX) was up more than 7%, demand for the 10-year-Treasury note is pushing its yield lower, and domestic oil futures have slipped back below $40 a barrel as economic worries raise concerns about demand for fuel.
Domestic economic news in the form of weekly jobless claims numbers wasn’t that great this morning. The latest initial unemployment claims figure came in at 898,000, more than a Briefing.com consensus estimate of 830,000, underscoring that the U.S. economy, which is a key driver of global fortunes, appears to be far from out of the woods.
But to keep things in perspective, the VIX is still below 30, and futures tied to the S&P 500 Index (SPX) indicated an opening above 3400. So in the grand scheme of things, the market doesn’t seem to be that bad off.
Bank Earnings Continue
Not everything in the news flow is doom and gloom this morning.
Morgan Stanley (NYSE: MS) continued the drumbeat of big bank earnings reports by beating analyst estimates on both top and bottom lines, helped by a rise in investment banking revenue.
The beat comes after Goldman Sachs Group Inc (NYSE: GS) handily topped analyst earnings expectations, and revenue also came in ahead of forecasts. Bank of America Corp (NYSE: BAC) reported earnings that beat estimates, but it missed on revenue. Wells Fargo & Co (NYSE: WFC) missed on earnings even though revenue was higher than expectations. JP Morgan Chase & Co. (NYSE: JPM) and Citigroup (NYSE: C) reported earnings and revenue that exceeded analyst forecasts.
Stocks Erase Gains Wednesday
On Wednesday, stocks initially were recovering from the previous session’s downturn. But the time in the green didn’t last, as hopes for a congressional stimulus deal before the presidential election next month faded further.
Although Treasury Secretary Steven Mnuchin said Democrats and Republicans have made some progress, he said that the two sides remained far apart on certain issues and clinching a deal before the election would be hard to do.
The comments marked the second day that stimulus worries helped lead the stock market lower. On Tuesday, U.S. House Speaker Nancy Pelosi said a $1.8 trillion package from the Trump administration falls short of what is needed. The same day, Senate Majority Leader Mitch McConnell said the Senate will vote on a limited coronavirus aid package this month. With all the division around the issue, it seems the fate of that proposal isn’t certain.
Initial strength on Wednesday was probably due to investors digesting decent earnings reports from big banks.
As of yesterday, S&P Capital IQ consensus estimates called for a third quarter S&P 500 earnings per share decline of 21.5%, a less dire outlook than Sept. 30, when estimates were for a 24.1% fall, according to investment research firm CFRA.
Energy Stocks Stay Positive
Wednesday turned into a risk-off kind of day. The VIX rose, the 10-year Treasury was in higher demand, and investors turned to gold as a perceived safe-haven.
So it was interesting to see the Energy sector, which is generally considered riskier, manage to stay in positive territory for the day. It seems that the sector got a boost from a jump in oil prices ahead of an Energy Information Administration report that Reuters said is expected to show a decline in crude oil stockpiles.
A weaker dollar also likely helped oil by boosting demand by making the dollar-denominated commodity less expensive for holders of other currencies. And news of continued OPEC+ commitment to reduced output also seemed to be a positive.
CHART OF THE DAY: VIX UPTICKS. The Cboe Volatility Index (VIX), which is Wall Street’s main measure of fear, has been on the rise as the stock market has floundered on worries about a Congressional stimulus package, concerns about progress in fighting the coronavirus, and jitters emanating from Europe. Yet it is encouraging to see the VIX much lower than it was earlier in the year despite unknowns about the economic recovery and the upcoming presidential election. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.
Below Target: Much has been made about the Fed’s shift to average inflation targeting because of the implications that the central bank will allow inflation to run above its 2% target at times without immediately clamping down by raising interest rates. But, given the current state of the economy, it seems like we’re pretty far away from inflation in excess of 2%. The latest core personal consumption price index, which is the Fed’s preferred inflation gauge, registered a 1.6% annual increase in August. And core consumer price index data for September, out this week, showed a 1.7% annual rise. Of the CPI data, Briefing.com said: “The inflation rate isn’t going to be ringing any tightening alarm bells at the Federal Reserve.”
Stimulus and Inflation: With GDP in contraction and the unemployment rate high, it seems that the economy has a ways to go before it gets anywhere near problematic inflation levels. And it may take a while before inflation even gets into the Fed’s target zone. One of the things that might help inflation get there sooner, by stimulating the economy, is a continuingly elusive new coronavirus aid package from Congress. “Despite a recent uptick, inflation is still running below our 2 percent longer-run objective, Fed Vice ChairRichard Clarida said Wednesday in prepared remarks for a speech. “It will take some time to return to the levels of economic activity and employment that prevailed at the business cycle peak in February, and additional support from monetary—and likely fiscal—policy will be needed.”
Used Vehicle Market Revs Up: Despite inflation being below the Fed’s target, it’s nice to see some stirring on the inflationary front, as a certain amount of rising prices can be reflective of a healthy—or in this case, recovering—economy. In the latest CPI report the index for used cars and trucks jumped 6.7% to post its biggest monthly increase since the late 1960s. It might be that people are favoring cheaper used vehicles over more expensive new ones because of the economic downturn, but at least they’re buying something. Still, with price changes for apparel and transportation services in negative territory and shelter prices rising just 0.1% in September, overall inflation remains muted.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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