Moderna, NVIDIA, Deere Form Bright Spots Amid Worries Over U.S.-China Relationship

(Friday Market Open) This week’s optimism about a coronavirus vaccine continued on Friday, but the U.S. stock market was having trouble mounting a sizable rally as tensions about China weighed as trading got underway in the last session before the long Memorial Day weekend.

On the positive side, Moderna MRNA shares were up 5% in premarket trading after Dr. Anthony Fauci said data on the company’s coronavirus vaccine candidate looked “promising.” That news bookended a week that started with a strong rally that was helped by positive results from a human study of an experimental vaccine from the drugmaker.

Shares have also gained this week on economic optimism as U.S. states begin to reopen, while investors and traders have also been encouraged by the possibility of more economic stimulus.

Some corporate news has also been positive. After the bell yesterday, NVIDIA Corp. NVDA beat expectations for both earnings and revenue. The stock has been a darling for investors looking for bright spots during the pandemic. After falling with the rest of the market, the chipmaker has more than recovered, reaching record-high territory as stay-at-home orders have helped boost demand for its graphics processing units and chips for data centers. Its shares are up 1.6% this morning.

As the old ads said, nothing rides like one. John Deere’s (DE) earnings came in higher than the consensus estimate, which indicates that farming is probably still doing well, despite the fact that prices of major crops such as corn and soybeans are running well below those of last year. Remember: COVID-19 is clustered more in urban areas rather than the rural farmland. Plus people need to eat, which makes farming a relatively sustainable activity. It’s likely, though, that the pandemic will have an impact on the company’s future earnings given that some crop prices aren’t where DE would like them to be. But for now, DE beat on both the top and bottom lines, and shares are up more than 3.5% in the pre-market.

But not all is calm on the geopolitical scene. Tensions between the world’s two largest economies have been on the rise. Overnight, Hong Kong’s Hang Seng Index sank more than 5.5% amid concerns about a Chinese national security law being implemented in the former British colony that’s a global financial hub. President Trump has warned of a strong reaction from the United States regarding the imposition of the law.

Market participants have also expressed worry after tweets from President Trump that were critical of the Asian nation, the passage of a Senate bill that could keep some Chinese companies from listing on U.S. stock exchanges, and a White House report criticizing Beijing. For its part, China said it will guard its sovereignty, security, and interest, threatening countermeasures, according to Bloomberg.

Those developments bring back memories of the back-and-forth rhetoric that drove market volatility before the United States and China reached a phase-one trade deal. It seems that market participants are worried that a return of that level of uncertainty could short circuit the bounce we’ve been seeing after the big coronavirus-related selloff.

The simmering tensions are something to keep an eye on over the next couple of months as they’re the type of developments that could end up boiling over into new tariffs, or at least contributing to market volatility.

Jobless Claims, China Tensions Subdue Market
The outperformance of NVIDIA and other tech-related companies is a stark contrast to other parts of the economy, which keep shedding jobs even as a reopening takes tentative steps in some locales.

Weekly jobless claims for initial unemployment benefits climbed again in the week ended May 16, according to the latest government data, released yesterday. Initial claims rose by 2.438 million when a Briefing.com consensus had expected a 2.4 million gain.

Even though the gain was slightly larger than expected, it still marked another week where the rise was smaller than that in the previous period. Plus, the prior week’s tally was revised lower, to 2.687 million from 2.981 million.

Still, the tally of continuing claims rose by more than 2.5 million to an all-time high of 25.073 million, a sobering metric giving a sense of how deep the coronavirus-sparked economic malaise is.

In Thursday’s trading, it looked like the jobless claims report and continued tensions between the United States and China formed a good enough backdrop for investors to book some profits from earlier gains.

Selling May Not Reflect Deep Worry

Still, the selling Thursday felt more like it was driven by the desire to take profits rather than deeper worries about the economic recovery, which have been tempered as states allow businesses to reopen.

Deeper worry about economic demand would have probably also led oil prices lower. Instead oil hit its highest point since March, supported by declining U.S. inventories, recovering demand as economies reopen, and supply cuts from major producers. Oil has been struggling to find an equilibrium since the start of the pandemic, with a storage glut forcing producers to scale back operations, both in drilling and processing. If the economy does come back online quickly, there’s some concern that production will need to play catch-up, as the oil supply chain is a tad more complex than flipping a switch. The push and pull of crude supply and demand may mean the volatility could continue for quite some time.

And while the Cboe Volatility Index (VIX), Wall Street’s main fear gauge did rise, it managed to close below 30, a level well below where it was at the height of the coronavirus-led selloff, but still well above 20, a level seen by many as the point of elevated caution.

There aren’t any major economic reports on the calendar for today. Next week’s schedule includes data on new and pending home sales, consumer confidence, durable goods orders, and personal income and spending. The government is also scheduled to release its second estimate for first-quarter gross domestic product.

In earnings news next week, while the season is winding down, investors may want to take a look at earnings from Carnival Corp. CCL, Toll Brothers TOL and Costco Wholesale Corp. COST to try to get a better sense of the travel, housing, and grocery industries.
 

CHART OF THE DAY: U.S. DOLLAR’S HOLDING STEADY. After some relatively volatile moves, the U.S. Dollar Index ($DXY–candlestick) seems to have settled into going up and down within a triangle pattern (yellow lines). Typically, breakouts from triangles tend to be trend continuations but it’s hard to say what the trend might be for $DXY. It could go either way. Data source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

The Dollar’s Triangle: As businesses start opening up and governments and central banks around the world take action to support their economies, it appears that investor optimism is returning to stocks. Equity markets look to be bouncing back as is crude oil, signs that consumer confidence may be strengthening. Because of this, demand for safe haven investments such as the U.S. dollar may be softening. This can be seen in the price action of the U.S. Dollar Index ($DXY), which after a steep rally, appears to be moving within a triangle pattern (see chart above).

When Fed Chairman Jerome Powell stated on Tuesday that the central bank is prepared to use whatever tools it can to limit long-term damage to the U.S. economy, we saw a selloff in the U.S. dollar. $DXY reached the lower limit of the triangle pattern. Since then it has been bouncing off that level. But this is still a headline-driven market and anything that lowers confidence could send investors back to the dollar and other safe haven investments.

Housing Data Mixed: Existing home sales data yesterday rounded out a week of mixed numbers for the housing market. On Monday, the May housing market index from the National Association of Home Builders and Wells Fargo (WFC) came in higher than expected as builder confidence increased. Low-interest rates are sustaining demand, which the NAHB expects will strengthen as peoplereturn to work. But building permits and housing starts in April declined sharply, according to Tuesday data, with permits falling less than expected but starts dropping more than forecast.

Wednesday figures showed a weekly decline in overall mortgage applications, but applications for home purchases rose 6%, continuing recovery from April’s drop according to the Mortgage Bankers Association. According to Joel Kan, associate vice president of economic and industry forecasting with the MBA, it remains to be seen whether that positivity continues or is merely a reflection of shorter-term, pent-up demand.

Existing Home Sales Not Stellar: That brings us back to existing home sales, with Thursday’s data showing a sharp decline in April to the lowest level since July 2010. But there was a silver lining, at least from a seller’s perspective. “Sellers pulled listings amid the COVID-related downturn in demand, yet the inventory constraint translated into higher prices for buyers remaining in the market,” Briefing.com said. There isn’t any major housing data scheduled for release today.

As a reminder, U.S. financial markets will be closed Monday in honor of the Memorial Day holiday. The Daily Market Update will resume Tuesday morning. Have a safe but enjoyable weekend and remember: All gave some and some gave all. Please keep those who gave their lives for our country in your thoughts and prayers.

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