(Thursday Market Close) Geopolitics came back with a bang Thursday
All those fears many investors seemed to put aside in the last few days returned to smack U.S. stocks, sending major indices to their first really negative session since early last week. A CNBC report that President Trump might not meet Chinese President Xi before the March 1 deadline for a trade deal appeared to combine with worries about slower European growth, re-sparking some of the volatility that’s been missing lately.
It’s worth mentioning, though, that stocks finished the day well off the lows, really picking up steam in the last hour of trading. Notably, after holding above 2680, a level seen as a key spot for some chart watchers, the S&P 500 Index (SPX) finished the day just above 2704, another possible key technical point. This could be seen as a bullish sign, but we’ll have to wait and see.
Brought to You by the Letter V
Though the day was marked by a bit of negativity, it’s important to consider keeping things in context. The market has been in a V-shaped recovery marked by six-straight weeks of gains for the Dow Jones Industrial Average ($DJI). Nothing ever goes straight up, and none of the news Thursday could really be called a major surprise.
Slow European growth isn’t exactly a new issue, as it’s been fretted about for many years. The same can be said for Britain’s imminent departure from the European Union. Also, the process toward some sort of U.S./China trade agreement is bound to have its bumps and bruises.
Thursday’s action does point again to how the markets have the propensity to turn on a dime whenever there’s a headline development concerning the trade situation. That’s why the low volatility earlier this week, where the VIX fell below 16—and almost dropped below the 15 handle—might have been a bit premature (see more below).
The report by CNBC this morning that Trump and Xi likely won’t meet before the deadline wasn’t the only negative China development helping play into the market’s troubles Thursday. Trump’s economic advisor Larry Kudlow told Fox Business News that the two sides have a “pretty sizable” distance to go. That’s a bit disconcerting to hear just a few weeks before new U.S. tariffs are threatened.
Losing Energy Amid Trade Fears
The escalation of worry about the U.S.-China trade war pressured oil prices along with stocks as traders and investors apparently took a risk-off approach Thursday. A worry among oil market participants appears to be that a prolonged situation of retaliatory tariffs could dent global economic growth. When that happens, demand for oil products often falls.
The decline in crude helped push energy sector stocks lower, with the S&P energy sector the biggest loser on the day, down over 2%. It seems likely that volatility in crude might continue on any news out about the Brexit situation and the U.S.-China trade war.
On the other hand, crude might have gotten some support from news of a smaller U.S. crude and gasoline build last week versus what analysts had expected. This might indicate a boost in consumer demand.
Meanwhile, with the energy sector sliding on oil prices, all of the other SPX sectors were in the red as well, with the exception of S&P 500 Utilities and real estate. That looked to be another symptom of the risk-off trading today. Both of those sectors are often thought about as defensive.
With market participants moving away from riskier trades, it wasn’t that surprising to see Wall Street’s main fear gauge, the CBOE Volatility Index (VIX) rise above the 17 mark. What has been somewhat surprising is how low the VIX has been recently, trading well under the 20 level where it’s spent much of its history. And on a day like today, it also seems surprising that the measure wasn’t up more.
It’s possible that market participants aren’t that worried given all the green days we’ve seen so far this year. With so much upside, some of today’s action may be a squaring of positions with some profit taking to refresh some portfolios heading into Friday and the weekend. If traders and investors were just looking for an opportunity to do that, it makes today’s reaction to the headlines seem less scary.
One thing that became evident Wednesday and Thursday was the S&P 500’s (SPX) failure to eclipse its 200-day moving average at about 2740. This key resistance was tested earlier in the week, but selling appeared to pick up when the SPX failed to move above that level.
Financials: BBT, STI Pop on Merger Plan; Weakness Prevails
The financial sector started the day with a piece of positive news—the announcement by BB&T (NYSE:BBT) and SunTrust (STI) of a $66 billion merger (or is it a buyout?)—which helped propel the shares of both firms. If completed, the deal would make the combined company the 6th largest U.S. bank.
Though BBT is essentially buying SunTrust in the all-stock deal, the banks’ executives are calling it a “merger of equals.” By the end of the day, BBT shares rose nearly 4% and shares of STI were higher by over 10%.
Aside from that, however, the sector flagged Thursday, finishing down about 1%. While the BBT/STI deal was a positive for regional banks, big banks such as Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) finished the day in the red zone, in large part due to a fall in Treasury yields.
The benchmark 10-year yield fell 5 basis points to 2.66. The spread between the 2-year and 10-year narrowed a touch, to 17 basis points. Falling yields and a narrowing yield curve can cut into bank profitability, so many investors have been watching the yield curve closely.
FIGURE 1: OIL SLIPS. The chart on U.S. crude oil looked pretty ugly from October through the end of last year. Crude has bounced markedly, along with a 2019 rally in equities, but that strength has been fading. Data Source: CME Group (NASDAQ:CME) The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.
Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.