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Twists And Turns: This Week's Wild Ride Swings Through U.K., Italy, China

JJ Kinahan

Have you ever been on a roller coaster that takes you on a series of dips, twists and turns, and then, just as it feels like you’re slowing down and heading into the station, it sends you through one more action-packed set? If early market activity is a guide, today might be that kind of thrill ride.

After Thursday’s hot rally following Wednesday’s impressive reversal, many investors were likely looking to coast into a nice summer weekend, but the market seems to have had other plans. While much of this week’s volatility stemmed from tensions across the Pacific—namely another breakdown in trade talks with China, followed by their central bank allowing the yuan to weaken versus the buck—some of this morning’s market stress seems to be coming from across the Atlantic.

On the earnings front, Uber Technologies, Inc. (NYSE: UBER) is in the crosshairs this morning, with shares sliding more than 8% in pre-market trade after results missed estimates. Shares continue to trade below the IPO price of $45. The ride-sharing company reported a loss of $5.2 billion as revenue of $3.17 billion fell short of the $3.36 billion third-party analysts expected. Much of its losses were attributable to stock-based compensation, without which it would have had a loss of about $1.3 billion.

Italy and Brexit

Europe was led lower by a sharp drop in Italy, as one of the country’s ruling parties called for snap elections, sending the stock market down over 2% and the yield on its benchmark 10-year up 20 basis points to about 1.75%. That might not sound high, but when compared to the negative yields across most of the continent it seems to indicate elevated risk.

Over in Britain, the pound fell to a two-year low as U.K. Prime Minister Boris Johnson said he plans to hold new elections after Oct. 31, when the country is expected to leave the European Union. Meanwhile, the opposition looks to be mulling a no-confidence vote in the prime minister. Once again, the U.K. seems to be split between those who favor a hard Brexit and those looking to delay and negotiate. The markets seem to be stuck in the middle.    

Back to China

Though the China trade situation ebbed a bit later in the week, that issue doesn’t appear to be going away any time soon. Telecom giant Huawei, which has been at the forefront of the trade battle—as well as the battle for 5G dominance—just announced the launch of a new operating system, saying it could switch from Alphabet Inc’s (NASDAQ: GOOG) Android OS “immediately” if needed. Plus, the White House announced it will delay a decision to allow U.S. companies to resume business with China-based Huawei.

With Thursday’s rally, the S&P 500 Index (SPX) is down about 3% from its all-time high close. That means even if you feel like your wallet is a little emptier after the turmoil of the last two weeks, in reality, stocks aren’t too far from the “priced for perfection” levels of late July. But any further tweets, tariffs or currency reprisals from the U.S. or China could turn things around quickly.

Volatility Ebbs as Economy, Earnings Hold Their Own

Volatility is down from peaks of around 24 for the Cboe Volatility Index (VIX) earlier this week, but VIX is still above 18, elevated from lows of around 12 last month. With all the geopolitical tension, especially around trade, it’s possible the foreseeable future could continue to be noisy.

The Atlanta Fed’s GDPNow indicator’s estimate for Q3 growth remained at 1.9% on Thursday, unchanged from Aug. 2. Meanwhile, some analysts say earnings might grow a little in Q2 but are in danger of falling in Q3 (see more below).

With the economy only growing slightly and earnings looking decent but not strong, it’s hard to see many new positive catalysts beyond potential rate cuts or some sort of unexpected progress with China. A breakthrough isn’t impossible, but it’s not something most people would probably want to count on, either.

Crowded Calendar Next Week for Earnings and Data

Next week may seem a long way off, but it’s not too early to start thinking about key data releases. They include July consumer prices on Tuesday, July retail sales on Thursday, and housing starts and building permits on Friday. It’s shaping up to be a big week from the perspective of consumer health, which drives so much of the economy.

The data could be worth watching more closely than usual simply because the market is on edge about the Fed’s next move. If the numbers on retail sales and housing look strong, it could play into thoughts that the Fed might not want to get too aggressive lowering rates further. It could be another example of “good news being bad.” Weekly jobless claims on Thursday were better than expected, another possible signal of economic health.

As of late Thursday, CME futures showed a 100% chance of a rate cut next month, but just 25% odds of a 50-basis point cut. That might be the percentage to watch as the data come in next week.

With the majority of earnings this season behind us, earnings season is still not over. Macy’s Inc (NYSE: M), Alibaba Group Holding Ltd (NYSE: BABA), and Walmart Inc (NYSE: WMT) all step up to the plate next week, putting retail in the spotlight. Technology gets its share of the pie with Cisco Systems, Inc. (NASDAQ: CSCO) and Nvidia Corporation (NASDAQ: NVDA) also due to report next week. Multinational machinery-maker Deere & Company (NYSE: DE) wraps things up next Friday.

Though Q2 earnings have generally exceeded expectations, one thing we haven’t seen much is stronger guidance. This could be because many companies feel cautious about getting too optimistic due to the trade situation and apparent slump in global economies. Retailers could be especially interesting to watch on guidance, especially with the holiday shopping season just a few months away.

Sector Reversal as Cyclicals Shined Thursday

From a sector perspective, some of the same areas that got pounded earlier this week threw a party on Thursday. Semiconductors, part of the Technology sector, were especially strong as Advanced Micro Devices, Inc. (NASDAQ: AMD) rolled up double-digit gains after the company released the second generation of its processor chip for data centers and said that it had landed GOOGL and Twitter Inc (NYSE: TWTR) as customers, Reuters reported.

Financials got some of their mojo back as rates rose, and Energy also had a comeback thanks in part to a rally in crude, which seems to be continuing to strengthen this morning. “Defensive” sectors Utilities and Staples brought up the rear, but generally it was hard to find anything to complain about for the bulls. For the moment, cyclicals seem to be back in vogue, but it’s going to be interesting to see if it can stay that way if bonds start rallying again.

Speaking of which, both gold and bonds recovered some territory late Thursday from earlier lows. That could reinforce feelings that we’re far from out of the woods, which is true enough.

One thing to consider watching today is whether investors feel they can enter the weekend without taking some of Thursday’s gains off the table. Lately, with markets so skittish, Fridays can see position-squaring as people get nervous about possible geopolitical trouble developing on Saturday and Sunday.

FIGURE 1: STORMING BACK: Earlier this week, it was harder to find two sectors more down in the dumps than semiconductors (SOX - candlestick) or Financials (IXM - purple line). Over the last two days, the tables turned as they helped lead the market’s recovery. Data Source: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Earnings Overview: With the busiest part of earnings season wrapping up, it’s a good time to check how S&P 500 company performance has gone so far. As of midweek, S&P Global Market Intelligence has Q2 earnings projected to rise 1.4%, up from its June 30 estimate for a 1.5% drop. Other firms still see a chance for negative earnings in Q2, but estimates have generally been rising as earnings keep coming in above many pre-season projections. So far, earnings growth has been strongest in Real Estate, Financials, and Health Care, according to S&P Global Market Intelligence, with the sharpest quarterly losses in Communication Services, Materials, and Energy.

The firm sees companies continuing to struggle in Q3, projecting earnings to fall 2.7%. Earnings could move into positive territory with 1.4% growth projected in Q4 and 11.1% next year.

Resilient Greenback: One of President Trump’s tweets yesterday fretted over the strong dollar, which he said is hurting companies like Caterpillar Inc (NYSE: CAT), Boeing Co (NYSE: BA), and Deere. The U.S. Dollar Index ($DXY) is in the upper-middle of its recent trading range of between roughly 96 and 98, which it hasn’t really moved out of over the last five months. In fact, it hasn’t closed below 95 in nearly a year or above 99 in more than two years.

However, the dollar remains more robust than many people might have gotten used to during the 2004-2014 era when it mostly traded below 90, so today’s levels might seem challenging to companies selling products overseas. You’d think the dollar might come under more pressure due to expectations for Fed rate cuts, but with central banks around the world cutting already and the U.S. economy among the strongest, it’s hard to envision the dollar falling too much, despite the president’s hopes.

Need Money? If you’re the parent of a college student, it’s the time of year when those scary tuition bills could appear in the mail any day (or maybe they have already and they’re sitting on the counter waiting for you to open them). Some investors might be at the point where they need to cash out of a stock position to pay the bill, but might be hesitant to sell with the market so jumpy. For investors who need money for college or some other major payment, it might be worth considering selling your position over a period of several days rather than all at once. That way, if things whiplash quickly, you might come out at a decent average. Maybe one-third today, one-third next week, and so on. Of course, that would mean extra trading costs, a possible negative element to doing things in thirds or fourths.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.
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