Bond Yields Turn Sharply Lower, Disney Earnings Disappoint, Trade Tension Remains

After the tsunami that hit Wall Street on Monday, markets remain on edge. Take a look at how stock futures tumbled early Wednesday amid pressure from a jumpy bond market.

The bond market went crazy in the two hours before the open Wednesday in what appeared to be fallout from an influential trading firm predicting that U.S. yields could go negative. The 10-year yield sank from 1.77% at one point Tuesday down to 1.63% early Wednesday. Lower yields—which often signal worries over economic weakness—might be putting pressure on stock values.

This sudden reversal after stock futures had been up earlier could be another sign of how volatile stocks are right now, and possibly of thin volume. A thinly-traded market can sometimes exacerbate moves, and August trading can be light as many traders and investment pros tend to step away from their desks during what’s typically a sleepy month.

One possible reason for the bond market hiccups might be more soft data from Europe Wednesday as Germany reported a 1.5% drop in June industrial production from the previous month, something the Financial Times said could compound fears that Europe might be heading for a recession. The softness there is one major reason for pressure on interest rates here, and caution seems to be growing.

News also hit overnight that India, New Zealand, and Thailand all cut rates. U.S. yields remain inverted, and German bund yields are at new all-time lows. The U.S. 10-year yield is the benchmark and remains one to watch. Further losses there could spill into stocks as nerves tighten.

Before the sudden drop in futures, things seemed calmer. Financial headlines focused on exactly where China set its currency overnight. It’s probably fair to say that most of us didn’t start investing because we were interested in China’s daily yuan fixing, but that’s where things stand as the trade faceoff continues with no end in sight.

Investors are still digesting Tuesday’s turnaround on Wall Street followed by Disney’s (DIS) disappointing results (see more below). There’s a 10-year note auction later today, and weekly crude oil supply data are also due.

We’re not done with earnings season yet, as several notable names report in the next 48 hours (see more below).

In another sign that things remain on edge, the Cboe Volatility Index (VIX) remains just a fraction above 20. That’s down from highs near 24 earlier this week. On another cautionary note, the 10-year Treasury yield dropped below 1.7%, trading at nearly three-year lows of 1.66% this morning. Gold hit $1,500 an ounce for the first time since 2013. 

In addition, CME futures now show odds of 75% for an additional 75 basis points of Fed rate cuts this year, and a 30% chance of 100 basis points in cuts before the end of 2019. 

Disney Disappoints

Earnings news after Tuesday’s close wasn’t necessarily what bulls wanted to hear, as Walt Disney Co DIS missed third-party consensus views on both top- and bottom-lines. The stock fell more than 4% in pre-market trading.

The silver lining might be that Disney’s earnings were harder than normal to predict due to the $70 billion Fox merger that the company completed earlier this year. It was that acquisition, apparently, that led to much of the miss on earnings, DIS said.

Even with the roughly 4% drop overnight, DIS stock is outperforming the overall market by a lot this year, and there continues to be excitement about the launch of its streaming business, Disney+. Marketing will start to hit later this month, the company said on the earnings call, noting that marketing opportunities are “tremendous.” So we’ll likely be hearing a lot more in the near future.

Asked about tourism in China, executives on the call said DIS hasn’t seen any impact on operations at its theme park in Shanghai related to trade issues, but added that unrest in Hong Kong is causing disruption of visits at its theme park there.

Earnings season rolls on later today with Lyft Inc LYFT and Roku Inc ROKU, followed tomorrow by Activision Blizzard, Inc. ATVI and Uber Technologies Inc UBER. A lot of these companies are popular with Millennial consumers and investors, so the next 48 hours could provide good insight into what that generation is spending on.

Tuesday Turnaround

Though Tuesday’s revival—which was based in part on China not weakening the Yuan further— didn’t bring major indices anywhere near all the way back from Monday’s losses, it did ease some of the bleeding.

Technology, which took the biggest hit Monday, led the way Tuesday. The COMP outpaced other indices, but the Russell 2000 (RUT) small-cap index brought up the rear. Regional bank stocks, represented heavily in RUT, kept gains in check for that index as investors apparently remained concerned about the inverted Treasury yield curve and its potential weight on bank sector profit margins. 

The 10-year yield broke below 1.7% early Tuesday for the first time since October 2016. The current 10-year yield is 40 basis points below the three-month yield, and the inversion widened Tuesday even as stocks rallied. This could point to continued investor caution, and suggests that Tuesday’s stock strength doesn’t necessarily mean all the pain is over. 

In Technology, shares of Apple Inc AAPL rebounded slightly on Tuesday but remain way below where they were a week ago after reporting earnings. There’s a lot of concern about how the next round of proposed U.S. tariffs might affect the widely-held company, especially U.S. iPhone sales. Some analysts think AAPL could sell millions fewer units of the iconic phone in the U.S. with prices expected to rise with the proposed new duties.

Optimist Corner

If you’re looking for something to be hopeful about on the trade front, maybe it’s that China only allowed its currency to slide for one day before supporting it overnight. Back in 2015, there were two days of down notches in a row. Of course, China could allow the yuan to fall again, so that’s another negative overhang. Analysts said the midpoint China selected Wednesday for its currency was weaker than expected.

Another thing that might be positive is that the VIX didn’t really stretch out too much this week. It’s still trading above 20, which is traditionally on the elevated side. However, even at the worst moments on Monday it only moved up into the 22-24 area. There have been times in the last year when VIX has jumped to 30 or even higher on bad trade news, but this time things seemed restrained. Monday’s sell-off looked very orderly, and it hit the sectors one might expect to see get hurt the most from tariff worries.

Also, stocks managed to plow back and make solid gains Tuesday despite a mid-morning sell-off that severely sliced early gains and took major indices back down to unchanged or slight losses. The recovery from that could be a sign of resilience.

A Word on Technicals, and Crude

Technical support for the SPX appears to remain strong at around 2800 and just below that, near the 200-day moving average. The market bounced off that level overnight Monday and into Tuesday, potentially building new technical strength there. A close under that would probably set up additional technical selling. The 100-day moving average rests right at the big number of 2900, and that might turn into resistance on any move higher, technical analysts said.

It seems like crude divorced itself from the stock market slightly this week, falling more than 1% on Tuesday even as many stock indices rallied. There were rumors of possible talks with Iran, as well as reports in the trade press that China was continuing to import Iranian oil despite U.S. sanctions. Both of these developments, if they turn out to be true, could weigh on crude. The Energy sector was noticeably absent from Tuesday’s stock market upswing.

FIGURE 1: INCOMPLETE RECOVERY: This three-day chart of the S&P 500 (candlestick) vs. the 10-year yield (purple line) shows clearly that stocks didn’t really gain too much ground back Tuesday and that yields remain near recent lows. One potential positive development was the recovery in stocks early Tuesday after an early sell-off. Data Sources: S&P Dow Jones Indices, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 
Oh, By the Way: Amid all the recent turmoil, consider looking out for any other bad news companies might announce over the next few days. Sometimes when the market takes it on the chin and stocks are on a downswing, companies decide it’s a good time to deliver bad news. The thought might be there’s really nothing to lose since their stock price is under pressure anyway. This means if you have big footprints in any particular stock, consider the possible impact if bad news were to come out, and make sure you don’t have more invested than you’d be comfortable losing.

Rip Van Winkle Pays a Visit: The sell-off last week and Monday definitely took some wind out of the sails, but if someone fell asleep on Jan. 1 and woke up today, they’d probably consider 15% gains year-to-date for the S&P 500 (SPX) a pretty solid performance. The Nasdaq (COMP) is up 18% for the year. That said, indices are lower than they were in September 2018. One concern is how much of the 2019 gains might represent hopes for a resolution with China. One argument is that some funds in the market could come out if skepticism grows. The chance of more rate cuts could conceivably prevent stocks from falling out of bed, the way they nearly did last December, but it’s not a great foundation for a rally, especially considering Q3 earnings on average remain in the red.

It’s one thing to stage a rally when earnings are strong. It’s harder to justify when earnings are falling, though to be fair, this year’s comparisons are really tough for a lot of companies due to the tax cuts last year. 

Will Bitcoin Mania Resurface? With stocks taking a dive on concerns about U.S.-China tariff issues, we’re seeing a “flight to safety” with the rise of gold prices and demand for U.S. Treasuries. However, some argue that the digital currency bitcoin also may provide a “safe haven” in times of turmoil, although of course this currency is notoriously volatile. Still, it’s interesting how it’s performing. Now that stocks have taken a tumble, bitcoin seems to be stepping back into the spotlight. This week it went above $11,000 for the first time since mid-July.

The way bitcoin has risen during times of broader uncertainty, kind of like a “safe-haven” asset does, is why many analysts have dubbed it “digital gold.” However, “safety” and “digital currency” aren’t words normally associated with each other. This is an experimental product with a short trading history, and it’s important to understand the extremely high risks and potential to lose money.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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