Heading South: G20 Meeting In Argentina Puts China Trade Squarely in Focus

The last day of November means it’s almost winter in the U.S., but it’s spring in Argentina and that’s likely where focus will be going into the weekend as the G20 meeting gets underway.

Stocks seem to have a weaker tone ahead of the meeting after overnight losses in Europe and another leg down in the crude market. There’s a lot of debate about whether the U.S. and China can make any progress on trade as President Trump and Chinese President Xi prepare to dine together Saturday. One thing to consider keeping in mind is the chance that the meeting won’t result in anything quantifiable. We could be back here Monday morning trying to figure out which elements , if any, might have a market impact. 

That said, it’s probably a good idea to monitor events over the weekend and then take a look at pre-market trading Sunday night for possible clues to the market’s reaction. One thing that does seem clear but perhaps unlikely: If there’s no positive news out of the meeting, that could be very bearish.  

Is Santa Going To Swing By Buenos Aires?

It’s hard to recall any recent event with so much potential to swing influence as this weekend’s meeting between Trump and Xi. There’s often hope this time of year for a “Santa Claus rally,” but whether that happens could hinge to some extent on how things look coming out of Buenos Aires. 

That’s in part because if U.S. tariffs rise to 25 percent in January—as could be the case without some sort of agreement—it’s likely to be bad for the U.S. economy, with possible corresponding pressure on stocks. That could make it tough for a Santa Claus rally to materialize. 

On the other hand, it’s possible the meeting could result in pragmatism from the two sides and potentially lead to some sort of rally. In fact, The Wall Street Journal ran an article Thursday that hinted at the chance for a coordinated backing down from the two countries. Still, there’s likely to be a lot of tough talk in the near future, and that might keep volatility elevated. It’s actually hard to see volatility, as measured by the VIX, coming down much from current levels of just below 20 without some sort of trade resolution. In fact, it wouldn’t be surprising to see VIX go right back to 20 today from the current level of just over 19.5

If there’s a Santa Claus rally, one sector to consider watching is info tech, which has arguably suffered the most due to the tariff issue. Apple (AAPL) and its suppliers come to mind, along with the chip makers. 

On a more near-term note, trading today might be a bit slow ahead of the weekend meeting, with investors perhaps unwilling to take big new positions with so much apparently on the line as trade talks get underway. It could be interesting to take a look at how stocks perform in pre-market trading Sunday night for a first possible reaction to any meeting news.

Win Streak Ends as High-End Retailers Pummeled

A choppy market prevailed Thursday as some of the higher-end retail names got pushed around while financials and info tech also came down. The major indices fell moderately early on, came back to post big midday gains, and then lost ground and finished lower. The skid ended a three-day winning streak for the Dow Jones Industrial Average ($DJI), but indices remain on firmer footing for the week.

Retailers under pressure Thursday included Nordstrom, Inc. JWN, Kohl’s Corporation KSS, and Macy’s Inc. M. This followed Tiffany & Co. TIF getting taken to the woodshed Wednesday and again Thursday as investors appeared to punish the luxury brand for missing analysts’ quarterly same-store sales forecast.

Even as high-end retailers got smacked, some of the discounters like Dollar Tree, Inc. DLTR and Dollar General Corp. DG ticked higher on what appeared to be strong earnings from DLTR. Amazon.com, Inc. AMZN also moved in a positive direction early before giving up its gains.

One possible explanation for this divergence in retail could be that luxury retailers might again be feeling competitive heat from AMZN as that stock revives a little. Another possibility is that some investors might be preemptively selling some of the big retail stocks on fears that they could see their businesses hit by higher tariffs starting in January if no U.S./China agreement is reached. On the other hand, this is just one or two days of trading, so it’s early to call it a trend. 

On the tech beat, Microsoft Corporation MSFT lost some ground Thursday but has generally been on an upswing over the last week, running neck and neck with Apple Inc. AAPL for highest market cap. MSFT might be enjoying some benefits from its business model pivoting toward cloud computing. The cloud business continues to heat up and MSFT made a bet in that space that arguably seems to be paying off. 

Also in tech, some of the semiconductor companies have been doing a little better lately, including Intel Corporation INTC and Nvidia Corporation NVDA. Some of the recent strength in NVDA might reflect its cheaper valuation, along with the holiday shopping season, which might have the potential to help boost technology shares amid increased demand for electronics.

Crude Changes Mood

Crude appeared to execute a major reversal Thursday. Early in the morning, U.S. crude futures fell below $50 a barrel for the first time in more than a year after another U.S. weekly supply build and U.S. production staying at record daily levels. Then media reports surfaced that Russia might be ready to cut output, and crude quickly scooted back up to above $51 before losing its grip early Monday and falling back below $51 again. The OPEC meeting coming up on Dec. 6 continues to loom large for this market, as well as for the energy sector and possibly even bonds.

Speaking of bonds, the U.S. 10-year Treasury yield briefly dipped under 3 percent for the first time in more than two months early Thursday but recovered a bit to end the day near 3.02 percent. Analysts also said they saw some buying in the municipal and corporate bond markets after Fed Chair Jerome Powell’s speech on Wednesday. Debate continues about the exact possible ramifications of Powell’s remarks (see more below).

Some further thoughts from the Fed surfaced Thursday afternoon in the form of minutes from the last Federal Open Market Committee (FOMC) meeting. One takeaway is that Fed officials considered removing language about “further gradual rate hikes” out of fear that it might slow economic expansion. A number of companies have voiced concern about rising interest rates, so perhaps the Fed is picking up on that. The Fed also discussed emphasizing that it would react to data in deciding on its policy outlook. We’ve seen that recently in remarks from Fed Vice Chair Richard Clarida, who said this week that the central bank should be “data dependent.”

Anyway, the minutes kind of took a back seat after Powell’s comments this week about rates being “just below” neutral. The Fed news is more forward looking now, with investors likely to focus closely on the next FOMC meeting coming up Dec. 18-19.

Figure 1: Checking Risk Tolerance: This one-month chart tracking the tech sector (candlestick) vs. utilities (purple line) shows some signs of revival for the tech, traditionally a sector embraced when investors are more eager to take on risk. However, utilities, a so-called “defensive” sector, continue to outpace tech as concern centers on the U.S./China trade relationship. Data Source: S&P Dow Jones Indices.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Inflation Still Appears Muted

One day after Fed Chair Jerome Powell seemed to indicate a more dovish view, inflation data came out that might support his position. Of all the inflation data each month, the Fed has said it most closely watches the Personal Consumption Expenditures (PCE) price number. For October, it looked pretty benign, growing just 0.2 percent. This came even as personal spending rose a solid 0.6 percent and personal income rose 0.5 percent. Basically, the report showed that people continue to freely spend but prices remain relatively tame. The only fly in the ointment, Briefing.com pointed out, is that some of the higher spending was due to a rise in electricity and gas prices, so it wasn’t necessarily voluntary. At any rate, there didn’t appear to be much if anything in the data that would cause the Fed to take fright, and the report might support the recent dovish tone from Powell and other Fed officials.

Debating the Chair

Speaking of “dovish,” a lot of the post-game analysis after Powell’s speech Wednesday talked about how he hadn’t really been that dovish at all. Some analysts pointed out that he didn’t mention slower economic growth or sliding inflation, for instance. They called the market’s huge rally an over-reaction. It’s certainly arguable that the market didn’t have to zoom up the elevator the way it did, and Thursday’s losses might have been partly a reaction to some of the Wednesday exuberance. However, it’s a hard argument to make if you’re trying to say Powell didn’t change his tone. After all, in September he said rates were “a long way” from neutral, and now he’s saying they’re “just below” neutral, even though rates didn’t change between now and then. 

That said, some economists note that “neutral” could be as high as a range of between 2.5 percent and 3.5 percent, giving the Fed plenty of room for more rate hikes to get there from the current range of 2 percent to 2.25 percent. Other analysts argue that Powell is trying to send a reassuring message to the market, but that’s also debatable, because the Fed isn’t supposed to have the markets in mind as it makes decisions. Its responsibilities are price stability and maximum employment, not making Joe Investor happy. Perhaps Powell’s press conference on Dec. 19 after the next Fed meeting can help investors get a better sense of where the Fed chairman stands. For now, chances of a December rate hike are on the rise, reaching 86 percent Thursday according to the futures market. Chances of a March hike to follow December’s, however, are only around 40 percent.

Under the Radar

A couple of major and potentially market-moving developments kind of got pushed under the table this week amid excitement about Powell’s speech and the G20 meeting this weekend. There’s still Brexit and a possible U.S. government shutdown to contemplate, both of which could become factors in coming weeks. British Prime Minister Theresa May is having a hard time selling her Brexit plan to Parliament, with chances still out there for a “hard Brexit” that could potentially hit the euro, boost the dollar and potentially lead to pressure on U.S. stocks. Remember, a strong dollar has recently been one reason cited for U.S. market weakness. On Thursday, May warned that a “no-deal” Brexit could occur if Parliament doesn’t approve her plan before year-end, and the Bank of England warned that such a scenario could trigger a recession.

A partial U.S. government shutdown also could sneak up on investors, and in the past these events have sometimes weighed on stock prices. Congress continues to debate the president’s request for a border wall, and a deal needs to be done by Dec. 7—this coming Friday—to avoid a partial shutdown.

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