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Market Appears Hopeful On Trade Deal As Trump Meets With Chinese Negotiator

Qilai Shen/BloombergQilai Shen

The March 1 deadline for a trade deal between Washington and Beijing is now just a week away, and traders and investors continue to be riveted in their watch for developments in negotiations.

President Trump is scheduled to meet with China’s top trade negotiator today as the world’s top two economies continue trying to hash out a deal. The meeting comes a day after Reuters reported that negotiators from the United States and China had begun to “outline commitments in principle” on the thorniest issues in the trade dispute.

The market seems optimistic about the high-level talks, and without major economic data reports today it seems likely that the focus could remain on potential progress in a trade dispute that has affected billions of dollars in global trade and inflamed fears of slowing global economic growth.

Most major overseas indices were higher overnight on optimism that the tariff talks will have positive results. And it’s also interesting to note that trade-sensitive stocks such as Boeing and Caterpillar are doing well, apparently amid the positive sentiment on a trade deal permeating the wider stock market.

Given the good vibes, it’s perhaps not surprising that Wall Street’s main fear gauge, the Cboe Volatility Index is lower, currently below 15. That may change if we don’t see news on progress later today. (See more on the Cboe Volatility Index in the chart below.)

Woes for Kraft Heinz

In company-specific news this morning, Kraft Heinz Co. shares plunged more than 26% in pre-market trade after the packaged goods company shaved billions off the value of some of its top brands, including Oscar Mayer and Kraft.

In total, Kraft Heinz knocked $15.4 billion off the goodwill value of some of its assets as it reported lower than expected Q4 results, which included a net loss of $12.6 billion. Investors had further cause for alarm with its new dividend, down by about a third to 40 cents per share.

Kraft Heinz was on track to open at a record low since the company was created from a 2015 merger backed by Warren Buffett. Compounding its woes, Kraft Heinz also revealed it’s the subject of an investigation by the Securities and Exchange Commission, which is looking into its accounting practices.

Economic Data in Focus

While the economic data calendar is light, several Fed officials are scheduled to speak today. Market participants will have the chance to parse comments from presidents of the New York, San Francisco, and St. Louis Feds as well as the Philadelphia Fed chairman.

The speeches come on the heels of minutes from the last Fed meeting that showed the central bank seems to think the global economy is slowing. Fed participants noted softer consumer and business sentiment, along with weak foreign economies. (See more on consumer sentiment below.)

That sentiment seemed to be borne out Thursday, as economic numbers out of the U.S. and Europe seemed to provide a counterpoint to optimism about the progress on a trade deal.

Fears about a protracted trade war harming global economic growth have hounded stock market investors and traders for months and have ratcheted up as economic data have begun pointing to slowing growth in China, Europe and the United States. But investor optimism has seemed to be growing that the world’s two largest economies can hammer out a deal before the deadline when U.S. tariffs on certain Chinese goods are scheduled to increase from 10% to 25%.

It was data that seemed to take the spotlight on Thursday. Overseas, an IHS Markit report for February showed that its manufacturing purchasing managers index for the euro zone slipped into contractionary territory.

On this side of the pond, economic data was not stellar, and the lackluster figures perhaps provided an excuse for a bit of profit-taking after the gains we’ve seen recently.

The monthly report on durable goods orders from the Census Bureau showed headline orders in December rose 1.2%, slightly behind the consensus expectation of 1.3%. But excluding transportation, orders rose just 0.1% when a 0.2% rise had been expected. And when you look at the numbers for core capital goods, which don’t include defense-related orders or aircraft, the reading showed a decline of 0.7% and a downwardly revised -1% for November. Those latter figures showed that “business investment remained weak,” said.

Manufacturing data out of the northeast wasn’t great either, with a February index from the Philadelphia Fed for February unexpectedly falling to -4.1 when a reading of 12 had been forecast in a consensus.

Meanwhile the leading economic indicators index from the Conference Board unexpectedly dropped in January, falling 0.1% instead of posting a 0.1% rise as expected in a consensus.

Housing data also continued to be problematic, as a report on existing home sales showed a decline in January to a seasonally adjusted annual rate of 4.94 million, when a consensus had expected a rise, to 5.05 million.

One bright spot in the data stream came as initial claims for unemployment benefits declined more than expected to 216,000 and continuing claims also fell. The data showed that the jobs market remains tight. That can be a signal of economic strength, though it can also help increase inflationary pressures.

Crude oil prices sank along with stocks amid the risk-off mood as the lackluster economic data seemed to sap investor and trader confidence in demand for oil. Government data that showed a build in U.S. crude oil inventories also appeared to pressure crude futures. But the bearish sentiment comes against a backdrop of support for the oil market from OPEC-led supply cuts and sanctions on Iran and Venezuela. Perhaps the progress on trade talks also helped keep oil’s losses in check.

Figure 1: As less-than-spectacular economic data helped push stocks lower, the risk-off sentiment also appeared to lift the Cboe Volatility Index on Thursday. Still, Wall Street’s fear gauge remains well below the peak seen late last year amid much higher market uncertainty. Data Source: Cboe Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.Data Source: Cboe Chart source: The thinkorswim® platform from TD Ameritrade.

GDP Forecast Trimmed: After disappointing durable goods figures yesterday, at least one measure of expected Q4 gross domestic product has slipped. The Atlanta Fed’s GDPNow forecast for Q4 seasonally adjusted annual GDP growth dropped to 1.4% Thursday from 1.5% on Feb. 14. The “nowcast” for expected Q4 real nonresidential equipment investment growth declined to 3.9% from 4.5% after Thursday morning’s durable manufacturing report. The government’s first official estimate of Q4 GDP is scheduled for release from the Bureau of Economic Analysis on Feb. 28.

Consumer Expectations Decline: Although the headline number on the Conference Board’s leading economic indicators didn’t seem too terrible – falling 0.1% – a look at the individual components showed that a decline in consumer expectations helped pressure the total index overall. The decline in consumer expectations formed another blow to consumer-related news in the United States. The data follow disappointing retail sales figures last week. And consumer confidence numbers for January declined more than expected. Recent consumer credit data has also appeared to continue to paint a picture of an American consumer that, while seemingly not down and out, hasn’t been showing as much strength as retailers might want.

Short Interest at Retailers: Speaking of retailers, several department store companies are scheduled to report earnings in coming days. If certain retailers report better-than-expected earnings, their shares could see a “sizable” move to the upside, helped by high levels of short interest, said investment research firm CFRA. “In such (a) case, the short sellers would get squeezed (they have to cover their short position by buying shares), helping to accelerate upside in those stocks,” CFRA said. As of Thursday, Macy’s had nearly 12% short interest, Kohl’s had more than 14%, and Nordstrom had more than 17%, substantially above the 5.1% average for the sector, CFRA said.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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