Wednesday, May 22, 2019

Markets decline on trade war concerns

Dow dropped 84, decliners over advancers 3-2 & NAZ pulled back 26.  The MLP index fell 1 to the 254s & the REIT index was even in the 381s.  Junk bond funds inched higher & Treasuries rose in price.  Oil lost 1 to the 62s as US crude supplies rose last week & gold was flattish at 1274.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil62.50

GC=FGold   1,274.10

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Treasury Secretary Steve Mnuchin said he has spoken with Walmart (WMT), a Dow stock & Dividend Aristocrat, CFO Brett Biggs regarding the next round of tariffs on Chinese goods.  Mnuchin told the House Financial Services Committee that he has been “monitoring the situation [tariffs] very carefully” & spoke with Biggs on what items they can & cannot source.  “We haven’t made any decision yet …” Mnuchin said.  “We will be sensitive to consumer items that particularly affect people on fixed salaries.”  The secretary said the dept had an exclusion process on the 4th round of tariffs which will be announced in 30-45 days.  He added that the process will be built in.  Mnuchin said China was paying for the tariffs because their “currency is taking a hit.”  “As currency depreciates our companies can buy things at lower prices,” he added.  Last week, WMT warned the Trump administration that tariffs on China mean higher prices for US customers.  Biggs told reporters they're "monitoring the tariff discussions & are hopeful that an agreement can be reached.”  The CFO warned that "increased tariffs will lead to increased prices for our customers.” 

Walmart CFO, Steve Mnuchin discussed tariffs amid concerns over higher prices for customers

While Federal Reserve officials insist they are comfortable with the current state of policy, traders still thinks the burgeoning trade war between the US & China will change that picture.  Much of the market chatter has been focused on the likelihood of an “insurance” rate cut this year, a move that would provide a buffer against any economic weakness that the tariffs could cause.  Economists worry that a prolonged impasse would sap consumer & business confidence & halt what has otherwise been the strongest growth of a recovery that began a decade ago.  Public statements from Fed Chairman Jerome Powell & almost all other central bank officials point to no rate increases or cuts this year.  Still, the futures market is assigning a 69% chance of a ¼-point reduction by the end of the year.  There also has been some indication that at least a few Fed officials are rethinking some of the rate hikes that have been approved over the past several years.  Mixed signals come amid an intensification in the trade war that has seen the US increase tariffs to 25% against $200B in Chinese goods while threatening to put levies on another $300B of imports.  China has retaliated with its own intention to slap tariffs against $60B of US goods.  Tariffs are generally considered inflationary as they raise the cost of goods, & major companies have warned that prices likely will go up.

Chances that the Fed will enact an ‘insurance’ interest rate cut are rising

Target (TGT), a Dividend Aristocrat, shares soared after the discount retailer reported fiscal Q1 earnings & sales that topped expectations, as it brought more people to its stores & convinced them to spend more money.  The e-commerce sales also surged 42%, as shoppers increasingly turned to its curbside pickup service for online orders.  Even with the looming threat of 25% tariffs on apparel & footwear imported from China going into effect, Target maintained its outlook for the full year. The upbeat report contrasts those of department store chains earlier in the week, which largely disappointed investors.  CEO Brian Cornell said TGT is “well-positioned to deliver strong financial performance in 2019 and beyond.”  He added Target's baby & toys businesses outperformed other categories & that the company benefited from increased traffic around Valentine's Day & Easter weekend.  “We continue to see a healthy economic backdrop for our business,” he said.  EPS rose to $1.53 compared with $1.33 a year ago.  That was 10¢ ahead of estimates.  Total revenues were up 5% to $17.63B from $16.78B last year.  That beat estimates for $17.52B.  Sales at company stores & its online business operating for at least 12 months were up 4.8%, better than expected growth of 4.2%.  This marks 8 consecutive qtrs of same-store sales growth.  Traffic at stores was up 4.3%, transactions overall were up 4.3% & the average transaction amount was up 0.5%.  TGT is still calling for same-store sales to be up a low-to-mid-single digit percentage for the year, with a mid-single digit increase in operating income & adjusted EPS falling to $5.75-6.05.  The stock shot up 6.65 (9%).
If you would like to learn more about TGT, click on this link:

Target shares jump nearly 10% as e-commerce gains f…

Stocks are wavering, looking for direction.  Minutes from the latest FOMC will be released later, although it should not have significant surprises.  While retail earnings have been choppy, concerns about where trade negotiations are going dominates thinking.

Dow Jones Industrials

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