Wall Street Under Pressure From Faltering Chipmakers, Weak China Industrial Production Data

The story of slowing global growth that Wall Street has been telling itself in recent months added a new chapter Friday in the form of Chinese industrial production data.

The latest numbers show industrial production in the world’s second-largest economy rising just 5% on a yearly basis last month, marking the weakest pace of growth in 17 years. 

The news comes as the trade war between the Asian nation and the United States drags on and President Trump has threatened additional tariffs on Chinese goods. With the globe’s biggest economies locked in a protracted trade spat, many have feared that the trade issue, which has led to the disruption of billions of dollars of goods traveling around the planet, will crimp global economic growth.

Chips Are Down

Meanwhile, chipmakers were under pressure after Broadcom Inc AVGO reported quarterly results where revenue fell short of analyst expectations, and cut its revenue guidance for the 2019 fiscal year. Broadcom shares were down more than 9% in pre-market trading, and the dour outlook seemed to be bringing others in the sector down as well.

The company’s CEO on a conference call reportedly said AVGO’s customers are reducing inventory levels as the U.S.-China trade conflict, including the Huawei export ban, creates uncertainty.

U.S. economic data showed that retail sales in May increased 0.5%, missing a Briefing.com consensus expectation of 0.7%. Despite the weaker-than-expected number, overall the U.S. consumer has seemed fairly resilient and appears to be able to generally absorb higher prices resulting from tariffs, although not all consumer goods from China have been affected. 

Oil Slips Back

Meanwhile, oil prices were under pressure again a day after attacks on oil tankers in the Middle East helped boost prices. It’s telling that the gains have been so short lived.

The Energy sector was the biggest gainer yesterday, helping move the wider market higher as international and U.S. crude benchmarks gained more than 2% aftertwo oil tankers were damaged in attacks near Iran.

But those gains didn’t last long amid worries about demand for black gold as the U.S.-China trade war has dragged on and increased concerns about the global economy.

The U.S. government has lowered its world demand growth forecast. OPEC underscored the demand-side worries by cutting its forecast for 2019 demand growth, and it also said it expects non-OPEC producers to increase output this year in excess of demand growth. And the International Energy Agency cut its global oil demand growth forecast for this year amid concerns over trade.

Stock Gains Thursday Seemed Subdued

News on the trade dispute between the world’s two largest economies wasn’t a dominating factor in Thursday’s trade. That left investors to focus on sector-specific news such as the attacks on oil tankers in the Middle East as well as corporate news, with American Airlines Group Inc AAL being a standout performer Thursday. (See more below.)

Volumes were light Thursday, and the day’s range for the S&P 500 Index (SPX) didn’t break above or below the highs and lows of the first three trading days of the week. 

The range-bound trading could be a result of stocks, as measured by the SPX, reaching their highest point since last month earlier this week and investors perhaps not wanting to push higher or lower given the relatively light news flow on the trade situation, which is the biggest overhang facing the market these days.

Gains earlier this week came amid hopes of a more dovish Federal Reserve ahead of the central bank’s meeting next week. But those gains arguably are already largely priced in, with much of the market not expecting a rate cut next week but apparently thinking policy makers will adjust their language to reflect a more accommodative stance.

Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) has been relatively steady over the past few days, hovering between 15 and 17 (See figure 1 below). While those are relatively low levels, they are above what we saw earlier in the year.

So it appears that the market isn’t completely afraid, but does remain on edge as the trade situation just won’t go away.

Figure 1: VIX FLATTENS: The Cboe Volatility Index (VIX) has been range-bound for days, keeping below its historically normal level but above what we’ve seen earlier in the year. Data source: Cboe Global Markets. Chart source: Thethinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Streaming Competition: Walt Disney Co DIS was by far the top performer in the Dow Jones Industrial Average DJI on Thursday, jumping more than 4.4% on news that Morgan Stanley MS raised its price target for the company as well as its forecast for Disney Plus subscriber growth. Morgan Stanley expects the upcoming direct-to-consumer streaming service to be trending toward 13 million subscribers in a year, leading to an estimated 130 million total subscribers on all its online video services globally by 2024. That’s competition for streaming heavyweight Netflix, Inc. NFLX, whose shares dropped Thursday. Disney Plus puts pressure on NFLX to continue making original programing, which is expensive, but to also create shows that are popular. Disney has a deep bench of original programming already, but will also have its work cut out for it. Arguably, whether Disney Plus ends up being a winner in the long run comes down to the endurance of the excitement level of the company’s catalog of great films being online for a long time. 

Caterpillar Sales: Even though there wasn’t much in the way of China-U.S. trade news on Thursday, investors didn’t forget the prevailing worry of the past few months that global growth could take a hit if the trade war between the world’s biggest two economies doesn’t come to an end soon. Caterpillar Inc CAT—which is one of the main trade-war proxies because of its sales into China as well as its sensitivity to global economic momentum—reported that total retail machine sales were up 6% on a rolling three-month basis in May. That compares with 7% in the previous period and 8% in the period before that. While the newest print does represent another slowdown, it’s not like it’s a terrible number overall. Its stock was little changed on the day. Arguably, its shares could have done better if there wasn’t the tariff fear hanging over the stock and perhaps causing a bit of inertia. At the same time, we could probably say that about the market as a whole. 

Airline Ticket Prices: On a day when oil prices rose so sharply, you might expect airline stocks to falter because one of their main cost inputs is for fuel. But on Thursday, American Airlines led the S&P 500 Index (SPX) higher with a gain of 6.4%, the index’s biggest winner for the day. United Continental Holdings Inc UAL, Southwest Airlines Co LUV, and Delta Air Lines Inc DAL also gained. JPMorgan Chase & Co JPM said that AAL had increased some fares and that LUV was also part of an industry trend of raising domestic ticket prices. And despite Thursday’s gains in oil prices, the airlines do seem to have a tailwind as crude prices overall have been declining for some time amid worries about the global economic growth situation.

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