Shanghai Softness: China's Weakness Spills Into US Trading, With Tech Under Pressure

If the phrase, “Never sell a dull market” needs a perfect example, yesterday might be the one. We had a really impressive rally despite very little market-related news. Today, the long streak of positive performances appears to be threatened. 

The S&P 500 Index (SPX) rallied for the fifth straight day yesterday, basically ignoring talk of a possible Fed stimulus tapering. Then overnight people started talking about it. Throw in some geopolitical strife and China talking about unfair competition, add a bit of Covid stuff, and you get what we have this morning: Major indices in the red. 

China is again the major focus today, in part because shares there tumbled 2% overnight. Some of the weaknesses could have to do with the country publishing what it called “draft rules” aimed at curbing “unfair” competition on the internet. Shares of some major Tech companies there got dinged, and that’s extending now to the Tech sector here. 

The softness in Shanghai is also weighing on crude for the second day in a row, as prices fell below $67 a barrel. 

You don’t have to go all the way to Shanghai to find pressure today. Back home, retail sales dropped 1.1% in July, way worse than the consensus on Wall Street for a 0.2% decline. Things look a little better if you remove autos from the equation. Doing that gives you a 0.4% drop. Still, when you match that up with a bunch of negative data reads lately including last Friday’s sentiment print, it paints a picture of consumers possibly being less willing to spend. Analysts immediately blamed the Delta variant. 

Strong Earnings Not Helping Walmart

It looks like investors are up to their old ways early Tuesday, selling good earnings news. Walmart WMT is the latest example.

When stocks are near all-time highs, everything’s got to look just about perfect to sustain the rally, and investors found an imperfection in WMT’s results. E-commerce sales grew a bit more slowly than expected, and some analysts say this is why WMT is down 1% in pre-market trading. Otherwise, numbers impressed, with WMT beating analysts’ top- and bottom-line estimates. WMT also raised guidance. 

Overall, not so bad. Especially a better than 5% rise in same-store U.S. sales. The news wasn’t quite as good on that front around the corner at Home Depot HD today, where same-store sales came in below expectations and shares took an early beating. Remember that for companies like WMT and HD, the comparisons are actually pretty tough compared to a year ago, because they were some of the only places open last spring and early summer when most of the country was locked down. We’ve lapped that period with the current earnings season. 

In other corporate news, Spirit Airlines SAVE stock is down 4% after the company canceled nearly 3,000 flights. 

In some ways, this morning feels like a repeat of yesterday morning. All the risk horsemen are trotting along as gold, volatility, and bonds rise and crude slips. That points toward more caution, which wouldn’t be surprising considering the Dow Jones Industrial Average ($DJI) has posted five consecutive sessions of all-time highs. With the market priced for perfection, so to speak, we might be seeing some profit taking and some risk-off trading. A bull-like this needs to be fed every day, and right now there just aren’t many positive catalysts. Some housing numbers tomorrow could get a close look considering the recent run of soft data. 

Buy The Dip Persists, But What Are People Buying?

The market managed to rebound from Monday’s early lows, another sign of how resilient Wall Street continues to be even as volatility and bonds jumped and crude eased. All of those non-stock moves typically reflect caution. 

That doesn’t mean you can’t find caution in the stock market. There’s plenty if you know where to look. Consider some of the stocks that got a bit of traction Monday. They included your usual suspects like Apple AAPL and Microsoft MSFT, but also some of the old-line consumer ones like CocaCola KO, McDonald’s MCD, Clorox CLX, and Procter & Gamble PG.

None of these companies are typically ones you see people buy hoping to quickly quadruple their money. They’re better known as steady performers with dividends that often do well even when the economy flags. A couple of other stocks doing well in the wake of the Afghanistan news were Lockheed Martin LMT and Northrop Grumman NOC, both known for their military contracts with governments. 

We didn’t get a hugely positive move yesterday, but “buy the dip” hasn’t necessarily gone away. It’s something that’s worked for many investors most of this year, and for now, they don’t seem to be abandoning it. Kind of like in football where if you can make 5 yards at a time running up the middle, you keep calling it until the defense figures out how to stop you. 

WMT earnings dominated this morning’s calendar, along with retail sales. Target TGT is expected to be the next big retailer reporting, and other major companies scheduled this week include Macy’s M, Kohl’s KSS, Lowe’s LOW, and FootLocker FL. Cisco CSCO and Nvidia NVDA. It’s the last gasp of earnings season before a long period where corporate reports will be few and far between and the market may get more pushed back and forth by other news, including potential geopolitics. And the Fed, of course. 

Fed Minutes Tomorrow Could Be Watched For Tapering Signals

Today’s retail sales and WMT earnings came after last Friday’s very disappointing consumer sentiment data and a bearish reading on Empire State manufacturing yesterday. It’s quite possible the Fed is watching these numbers very closely amid more talk of possible tapering. 

While we’re not likely to get any solid answers on the Fed’s next move until its Jackson Hole symposium next week, the market seems more certain that tapering is on the way despite the recent bad string of data. 

Several Fed officials—including ones you don’t normally associate with the hawkish side of the ledger—have made it clear recently that they think tapering needs to happen. We could get more insight into what they’re thinking with tomorrow afternoon’s release of Fed minutes from their last meeting. This report is often a way to be a fly on the wall and see what the conversation was like in the room when Fed officials gathered last month.

CHART OF THE DAY: OIL AND GASOLINE GO SEPARATE WAYS. Crude futures (/CL—purple line) have been trending lower for a few weeks now, but gasoline futures (/RB—candlestick), aren’t hurrying down so fast. Strong demand for gas in the U.S. during summer travel season might be helping prop up gas prices even as crude falters amid global worries about slowing growth, especially in China. Data Source: CME Group.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Don’t Have A Cow: There’s a lot of trepidation going into the Fed’s Jackson Hole symposium next week, with many analysts seeing Fed Chair Jerome Powell’s speech as an opportunity to announce plans for a tapering of the stimulative bond-buying program. Any type of announcement on that front would have a chance to start moving Treasury yields higher, and that tends to be negative for many sectors, especially so-called “growth” ones where a lot of companies rely on borrowing.

On the other hand, you could argue that a Fed announcement about taper timing isn’t necessarily an opportunity for a “taper tantrum” from the market. After all, if the Fed sees the time as ripe to taper, it must be seeing something good happening in the economy that could mean less need for the training wheels, so to speak. 

Riddle Game: One Fed-related riddle is this: Why do we continue seeing the 10-year Treasury yield keep retreating despite all this taper talk? The 10-year yield fell to 1.25% on Monday from a high last week of around 1.37%. If tapering is more likely, you’d expect to see the 10-year yield climb.

The answer could be that investors feel that a tapering program—especially if it’s over the course of months—could allow the Fed to tighten slightly without relying on rate hikes. A tapering program that manages to give the Fed a longer runway before raising rates might allow the Fed (and the market) to have its cake and eat it too. They can tighten the money supply and fight inflation without the formal step of raising rates. But that remains to be seen. 

Pain At The Pump: Wonder why gas still costs so much despite crude falling so sharply over the last month? Crude peaked near $76 in July and has fallen more than 11% since then, but gasoline futures are down less than 7% from their July highs. The average U.S. gas price remains near its summer high of $3.19 a gallon, according to AAA. Strong demand from motorists and airlines during the summer vacation season can keep gas prices elevated even when crude is under pressure. They’re basically marching to different drummers, with crude now hurting from signs of a slowdown in the Chinese economy. That doesn’t play so much into gasoline demand here, though ultimately if time goes by and China starts importing less oil, the savings might migrate to your local station. U.S. rig counts also recently reached a 16-month high, according to OilPrice.com, so there may be more supply coming online. 

Beyond that, the price at the pump doesn’t always immediately reflect changes higher “upstream” in the oil complex. The gasoline going into your car wasn’t refined today at today’s prices. It was refined a while back, possibly at a higher price, and selling gas isn’t a business with huge margins. Those folks who sell you lottery tickets at your local gas station can’t necessarily afford to take prices down now, but if you wait until this time next month, that lower-priced oil might start to have an impact on your pocketbook.

See also: HOW TO SPEAK CHINESE

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

Image by wei zhu from Pixabay