Chinese Lockdown Threats Pushing Oil Prices Lower

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(Monday Market Open) Investors appear to be starting off the week with the same skittishness they demonstrated on Friday. Equity index futures were pointing to a lower open. However, earnings season continues, along with news that Twitter’s (NYSE: TWTR) board is closer to reaching a deal with Elon Musk.

Potential Market Movers

Twitter (NYSE: TWTR) was up 4.6% in pre-market trading as The Wall Street Journal reported that company officials met with Elon Musk yesterday on a potential deal that could be finalized by the end of the week. However, CNBC is reporting that the deal could be done today.

Musk’s flagship company, Tesla (NASDAQ: TSLA), was down 3.29% in premarket trading as some investors fear that Musk will have to sell some of his Tesla stock to pay for his Twitter acquisition. According to CNBC, this is unlikely because Musk is putting many of his shares up as collateral for a loan and doesn’t have plans to sell them.

The Cboe Market Volatility Index (VIX) jumped higher in premarket trading and is now testing the 30 level. If the VIX breaks 30, this could be bearish for stocks on par with the uncertainty that spread through the market when Russia invaded Ukraine.

Stocks aren’t getting any help overseas. The Hong Kong Hang Seng was down 3.7% overnight and China’s Shanghai Composite fell 5.1% on news that COVID-19 cases are spreading to other cities like the capitol of Beijing and Shenzhen, a major Apple (AAPL) production city. According to the BBC, citizens have been panic-buying food and supplies in these cities as they expect to be locked down once again.

Oil futures are falling on the Chinese COVID-19news. WTI crude oil futures fell 4.53% to $97.45 in pre-market trading.

France’s Emmanuel l Macron is coming off his reelection win yesterday and is pushing for harder sanctions on Russia. Russia has also demanded the United States stop sending arms to Ukraine. Unfortunately, diplomatic solutions are getting less likely in the Russia-Ukraine war and the global community is looking to put more pressure on Russia. The STOXX Europe 600, German DAX, U.K.’s FTSE 100, and France’s CAC were all down about 2% this morning.

Investors appear to be looking for safe havens as Treasury bond prices are rising and the 10-year Treasury yield (TNX) was down 90 basis points in pre-market trading. Unfortunately for gold bugs, investors aren’t currently seeing gold as a safe haven. Gold futures were down 1.76% and is currently testing support around the $1,900 level. Last week, Newmont (NEM) dropped after missing on earnings as the company failed to manage expenses, but lower gold prices are likely to hurt the stock today. NEM was down 4.55% in pre-market trading.

Coca-Cola (NYSE: KO) was trading slightly higher in premarket action after beating on top and bottom-line numbers. However, this is a big week for major tech stocks earnings from Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOG), Meta Platforms (NASDAQ: FB), Apple AAPL, and Amazon (NASDAQ: AMZN). These heavyweights have the market cap that can move the major indices to positive or negative.

Reviewing the Market Minutes

Stocks sold off on Friday, the S&P 500 (SPX) fell 2.77% as the benchmark index moved lower, level to level. On Thursday, the SPX tested 4,500 before selling off to 4,400. On Friday, it dropped to 4,300. The bears were unable to sustain a move below the 4,300 level but one final push into the close finally broke through. This could an important level on Monday.

The Dow Jones Industrial Average ($DJI) also fell more than 1,000 points at one point but trimmed its losses to 740 points to close 2.82% lower on the day. The Dow was showing strength earlier this week as investors appeared to favor “old economy” stocks to tech stocks. However, the Dow gave all of its gains for the week and some.

The Nasdaq Composite ($COMP) actually held up a little better throughout the day, but still closed 2.55% lower.

The rise in investor fear was reflected in a spike on the Cboe Market Volatility Index (VIX), which jumped above 28. Despite the selloff, the 10-year Treasury yield (TNX) was down 11 basis points. Investors appear to be more afraid of the prospect of higher yields than the actual yields. 

Three Things to Watch

Forecasting the Fed: Despite the small move in the 10-year yield, investors appear worried that the Fed may be getting a little too aggressive. The Fed has been criticized for being behind the curve on inflation and now with Fed Chair Jerome Powell joining the hawkish chorus of Fed Governor Lael Brainard and St. Louis Fed President James Bullard, fear seems to be rising that the Fed is willing to let the economy take a slight dip with the goal of a soft landing off the table.

While yields may not have moved much, the probabilities have shifted for other rate hikes. The market continues to anticipate a 50-basis point hike in May, but now it’s anticipating another 75-basis point hike in June. That would take the overnight rate from 0.25% to 1.50% after the June hike. The market was anticipating the Fed rate to be between 2% to 2.25% by the end of the year, but now it’s pricing in 2.75% to 3% by year-end.

Revalue, Rinse, Repeat: As I’ve noted in the past, every time rate expectations increase, stock valuation, economic models, and forecasts change. Each rate hike decreases stock valuations and increases the likelihood of recession. For example, Gap (NYSE: GPS) reported earnings today and had to cut its earnings outlook to adjust for a period of higher cost and less credit.

Cleveland Fed President Loretta Mester was on CNBC downplaying some of the Fed hawkishness. She said that she didn’t favor a 75-basis point hike in June and felt like it would likely to take longer to get rates up to the levels the market is anticipating. However, she did say that it might take 2-3 years to get inflation back below the 2% goal. Ms. Mester is the last one to comment publicly as we’re heading into the blackout period where Fed member stop speaking and making media appearances before their May meeting.

Straightening the Curves: Earlier this month, Federal Reserve Governor Lael Brainard punctuated her hawkish talk with a discussion of the Fed’s plans to unload its balance sheet. The comments caused longer-term maturity yields to rise, which helped to steepen the yield curve. The yield curve as measured by the ratio between the 2-year Treasury yield and the 10-year Treasury yield had inverted at the first of the month, and the comments appeared to help normalize the curve a little.

The 2s10s ratio was negative when it was inverted but steepened to a positive 0.4 halfway through April. On Friday, the ratio was less than 0.2, which means the yield curve is flattening once again—often seen as a bearish sign by many investors. The Fed meets next week and is expected to raise its key rate 50 basis points. The Fed may want to get an immediate start on unloading its balance sheet if it wants to maintain a normal yield curve.

Notable Calendar Items

April 26: Durable goods orders, CB consumer confidence, new home sales, and earnings from Microsoft (MSFT), Alphabet (GOOG), Visa (V), and PepsiCo (PEP)

April 27: Pending home sales, and earnings from Meta Platforms (FB), T-Mobile (TMUS), and PayPal (PYPL)

April 28: Gross Domestic Product, and earnings from Apple (AAPL), Amazon.com (AMZN), Merck (MRK), Intel (INTC), and McDonald’s (MCD)

April 29: Earnings from Exxon (XOM), Chevron (CVX), and AbbVie (ABBV)

May 2: ISM Manufacturing PMI, Earnings from Berkshire Hathaway (BRK/A), Devon Energy (DVN), and Expedia (EXPE)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.