China Trade Balance and EU Industrial Production set Risk Off Tone

What You Need to Know Today

Things you need to know

  • China trade balance falls m/m but GREW y/y

  • EU Industrial Production plunges - Germany, Italy and France

  • Gov't shutdown enters 24th day

  • Trade talks to take place on Jan 30th 31st in DC

Stocks bounced around on Friday only to end the day slightly weaker as investors/traders took A breath.........the Dow, S&P and Nasdaq all ended slightly lower as the mkts prepare for the start of earnings week, while also continuing to be concerned about the ongoing gov’t shutdown, the border wall battle and the pending China Trade Balance data.....

And while the tone was less volatile - no one is expecting that the volatility is anywhere near over - at least not yet....much will depend on what happens over the next couple of weeks as we start to hear what the earnings reports say and what the guidance is predicting.  Now while we all know that earnings are not expected to grow at the 25% rate that they did in 2018 - the jury is still out what that new rate will be.  Expectations were in the 18%  range in early fall and have since been slashed to the 11% range - and there is still concern that earnings estimates will be slashed further as the season gets under way and conference calls reveal forward guidance .   

Look - Apple set the tone two weeks ago....declaring a ‘slowdown’ greater than even they anticipated due to ‘lack of demand for Apple products in China’ and THAT set off a flurry of selling activity....as so many traders/analysts/strategists tried to reconcile what it all meant.  Speculation about other ‘surprises’ started to dominate the conversation and the mkts collapsed.   Prices adjusted quickly as the algo’s went into overdrive ‘taking no prisoners’ creating opportunities for long term investors.  

Mkts have since rallied back fairly strongly and are now approaching real resistance at the downtrending 50 dma at 2630 although the century mark at 2600 is proving to be a bit of a challenge.  We have now rallied up to 2600 four times in the past 2 weeks and failed  - and this morning S&P futures are down by 20 pts as the mkt is set to test support  - but where?  2575?  2550?  

Weakness this morning is being tied to two headline issues:  1.  The ongoing gov’t shutdown- which is now the longest shutdown in history and there does not appear to be any ending in sight.....the President is at odds with Pelosi and Schumer and the whole Democratic Party that opposes the building of the wall.....Although - the Dems do say that they do have a plan to secure the borders using 21st century technology but have yet to define or outline what that technology is and that is also not helping the conversation - allowing both sides to dig their heels in and wait to see who blinks.  

2. The China trade balance report - last night revealed that December exports  fell  4.4% (vs. the expected 3% gain) from a year earlier, while Imports fell by 7.6% marking the biggest decline since July 2016 - exacerbating the NEGATIVE - YET they also reported that the 2018 yearly trade balance report actually GREW by 17% - which is a POSITIVE  (for China) yet no one is paying attention.  Why?  Because the December report fits the story of a weakening Chinese economy coupled with the ongoing trade war and as we enter earnings season - that is the story that is being crafted to help soften the blow when guidance is weak.  Blame it on China hoping that this will cause Donny and his team to come to the table and make a deal, while also keeping the FED at bay.  And so the band plays on.....Japan - closed for a holiday, HOng Kong - 1.4%, China - 0.71% and ASX fell by 0.2%.  

European mkts are following suit - starting the day weaker as investors there react to the China trade data being described as ‘a shock contraction in Chinese exports’ raising fears of a slowdown in the world's second-largest economy!.  Follow the negatives......so it is going to be a Risk Off day as the media plays on the WEAKENING Chinese economy and how it infects nearly every sector out there - construction, commodities, technology, consumer discretionary, financials etc.  

In addition all eyes are on Tuesday’s BREXIT vote that is certain to face complete failure - leaving PM May’s gov’t in shambles raising concern over the future of the UK gov’t, and the possible ‘do over’ of the whole BREXIT divorce....FTSE -0.48%, CAC 40 - 0.6%, DAX - 0.57%, EUROSTOXX - 0.53%, SPAIN  - 0.5% and ITALY - 0.77%. 

US FUTURES are down across the board - Dow -0.67%, S&P - 0.77%, Nasdaq - 0.85%, and the Russell is off by 0.57% as the sun gets ready to rise over the Atlantic.   Expect to see the algo’s run wild again as the SELLERS all go running for the door while the buyers take a step back - willing to buy stocks at lower prices vs. where they were on Friday.  It is everything I have outlined - so buckle up - today’s weakness will play right into the coming earnings season...I mean you can’t make this up. 

Look for support right in here at the 2575 level....but depending on how the news is dissected and delivered will dictate how the algo’s respond....if it’s all negative all day then we could slice right thru 2575, but if cooler heads prevail and positive talk about the next round of US/China trade discussions on Jan 30/31 in DC takes center stage - then we could see the sellers back off a bit.  Jay Powell has made it clear that he is not on an autopilot schedule to raise rates so this too should help calm down the algo’s.  But remember - indiscriminate selling of good stocks creates long term opportunities - so stay tuned.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.