Monday, July 1, 2019

Market's rally loses steam after trade talks resume

Dow rose 117 (finished 170 below the open), advancers over decliners a modest 4-3 & NAZ went up 84.  The MLP index was fractionally higher to 251 & the REIT index slid fractionally lower to the 382s.  Junk bond funds did little today & Treasuries were sold.  Oil climbed to the 59s when OPEC agreed to extend production cuts & gold sank 26 to 1387.

AMJ (Alerian MLP Index tracking fund)

During the first 2020 debate, many Dems argued that the US economy isn't working for small business small business.  However the leader of a major small business group says “that’s simply not true.”  “The [National Federation of Independent Business] has been doing the small business economic trend report for 45 years—and the data is in—this is the best economy for small business in 50 years. And it’s been setting records for the last two and a half years,” said NFIB CEO Juanita Duggan.  What’s more, for the “first time in a long time” it’s paying off, she added.  “They’ve been setting records for capital expenditures, for profits, for raising wages for their workers—I mean it just doesn’t get any better than this I don’t know what data [the Democrats] are looking at,” she said & added that “business is booming.”  “The average NFIB member has fewer than 5 employees & about $70K of taxable income.  So this is the half of the economy that is not reflected in the markets. It's half of GDP. It’s half the payroll,” she added.

Small business seeing the best economy in 50 years, report finds

American business groups applauded Pres Trump after he & Chinese Pres Xi Jinping agreed to restart trade negotiations at the G20 summit in Japan, easing tensions between the world's 2 largest economies.  “Business Roundtable is encouraged that President Trump and President Xi agreed to resume trade negotiations and suspend any further tariff escalation,” the organization said.  Business Roundtable members lead companies with more than 15M employees & $7.5T.  The pres declared that relations between the 2 nations were “right back on track” after the meeting.   He also lifted restrictions on US companies, allowing suppliers to sell components to Chinese telecom firm Huawei.  “We continue to support the Administration’s efforts to address long-standing unfair trade practices and urge both parties to conclude an agreement that addresses structural issues in China and removes tariffs,” the statement said.  “The CEO member of Business Roundtable will continue to assist in achieving a successful outcome.”  The world leaders, on Fri night, said they would restart trade talks after relations soured at the beginning of May, when a near-deal crumbled after US officials accused China of reneging on some of its promises.  The US already imposes a tariff on $250B worth of Chinese goods; however, Trump said he would consider lowering the tax rate to 10% from the proposed 25% during “phase two.”  The US Chamber of Commerce also praised Trump for the dovish pivot on trade.  “We hope each side is now prepared to go the last mile to achieve a high-standard, comprehensive, enforceable agreement,” their statement said.  “China must commit to addressing longstanding unfair trade practices and industrial policies that prevent a level-playing field for U.S. companies.”

US business groups praise Trump for trade cease-fire with China

Stocks may have brushed up against record highs.  However, a looming threat is just a couple weeks away once profit reports from a Q2 hit.  Analysts have been taking a dimmer view of what is ahead for earnings.  They've already forecast a decline for the first 3 qtrs of 2019.  Now companies are echoing those concerns with a level of pessimism not often seen from corp America.  Ahead of a season that starts in earnest in 2 weeks for the 113 companies that have issued EPS guidance, have warned that their numbers will be worse than what was estimated.  That total of 87 companies is well above the typical level of 70% negative pre-announcements & the 2nd-worst level since FactSet started keeping track in 2006.  The worst was Q1-2016, which saw 92 negative such warnings.  At a time when the Dow of blue chip stocks is coming off its best Jun since 1938, a wobbly profit picture doesn't do much to instill confidence that such an aggressive rally can continue.  Earnings for the S&P 500, which had its best Jun since 1955, are projected to decline 2.6% from the same period a year ago.  The issues with earnings now are multi-pronged but tied mostly to tariffs & waning global growth.  In terms of sectors, the 2 with the biggest negative pre-announcements — information technology and health care — are at the center of the tariff battle between the US & its global trading partners, particularly China.  Technology has been at the core of Pres Trump's tariffs against $250B worth of Chinese goods.  At the same time, his steel & aluminum duties are making a direct hit on the health-care industry, impacting about $1.8B worth of medical imports.  In addition to tariffs, health care also faces a serious regulatory risk ahead, with leaders in both parties expressing interest in curbing the amount pharmaceutical companies can charge for their drugs.

Companies are warning that earnings results are going to be brutal

China's manufacturing activity shrank unexpectedly in Jun, came in at its worst reading since Jan, according to a private survey.  The Caixin/Markit factory Purchasing Managers’ Index for Jun was 49.4, the lowest since Jan when the indicator came in at 48.3.  The forecast called for the indicator to come in at 50.  The PMI reading for may was 50.2.  PMI readings above 50 indicate expansion, while those below that signal contraction.  The lackluster reading was due to new orders falling into contractionary territory, pointing to shrinking domestic demand, siad the CEBM Group, a subsidiary of Caixin.  The index measuring new export orders was also in negative territory,  “Overall, China’s economy came under further pressure in June,” the group wrote.  “It’s crucial for policymakers to step up countercyclical policies. New types of infrastructure, high-tech manufacturing and consumption are likely to be the main policy focuses,” it added.  The Caixin survey finding was in line with readings from China's official PMI which stood at 49.4 in Jun, contracting more than expected, according to China's National Bureau of Statistics yesterday (unchanged from the previous month).  The forecast had predicted a reading of 49.5.  The official PMI survey typically polls a large proportion of big businesses & state-owned enterprises.  The Caixin indicator, features a bigger mix of small & medium-sized firms.  The PMI is a survey of businesses about the operating environment.  Such data offer a first glimpse into what's happening in an economy, as they are usually among the first major economic indicators released each month.  For China, the PMI is among economic indicators that investors globally watch closely for signs of trouble amid domestic headwinds & the ongoing US-China trade dispute.

Private survey of China’s factory activity in June shows lowest reading since January

The employment picture in the US turned a bit greener in the manufacturing sector, according to the Employment Index in the Institute for Supply Management survey for the month of Jun.  The ISM Manufacturing PMI shows a continuously improving picture in the labor market, as the Employment Index surged from 53.7% to 54.5%, the 2nd month in a row with a positive outcome.  The full Manufacturing PMI declined just a tad from 52.1 to 51.7 but still performed better than expectations, as it was expected to fall to 51.0.  The fundamental analysis guide to trade the US jobs report classifies the US ISM Manufacturing PMI employment sub-component is one of the 10 leading indicators that provide some hints of the status & trend of the labor market.

Manufacturing was better than expected in June, but inflation remains muted

The trade news rally did not hold even though the S&P 500 set a new record.  It was clearly underwhelming.  Traders recognize that talk is cheap.  Action, a signed contract, is needed & that is far away.  However the latest Chinese data (above) might put some pressure on them to reach an agreement.  For the rest of the week, markets will be driven more Jun data which should be coming in mixed & the big jobs number on Fri.  Then comes earning season.  Uhh!!

Dow Jones Industrials

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