Wednesday 8/14/19=DJIA -735 NASDAQ -233
The Recession Begins Tomorrow!
Daily Wrap: The chart below was the reason behind today’s big sell-off in the market. The 2 year and ten-year U.S. treasuries finally inverted. This has not happened since 2007. The ten-year treasury closed at 1.58% today, while the two-year closed at 1.59%. This is an early warning sign of a recession. This does not mean that a recession will begin tomorrow. The market sure acted like it will, however. Both the DJIA and Nasdaq were crushed today.
The market was down 400 on Monday, up 400 on Tuesday, and down 700 today. Does that mean we will be up 700 tomorrow? Wow, pass the Dramamine please!
I sent out tweets on the following stocks today: TVIX, EMTY, WDRW, TZA, APPN, NEE, and UBT.
But first, here is how we did yesterday. You remember yesterday don’t you. All of our troubles seemed so far away!
- Stocks scored a broad-based rally after the U.S. said it would delay and even remove some of Pres. Trump's threatened tariffs on Chinese goods, renewing hopes for some sort of trade agreement.
- Trump said the basis for his decision was to prevent consumers from feeling any tariff pinch during the holiday spending season, but some analysts say Trump might have been watching the escalating tensions in Hong Kong, knowing that a potential violent clash likely would drive the stock market - an important barometer he watches - even lower.
- So the tariff delay may have been used to mitigate some of the damage that might occur if events in Hong Kong unfold in a militant manner; in such an event, today's rally could be undone but perhaps not to the extent it would have been if it the full weight of the tariff increase was going into effect on September 1.
- In any case, the upbeat news contributed to gains in all 11 S&P 500 sectors, including gains of at least 1% in nine groups, led by information technology (+2.5%), consumer discretionary (+1.7%) and communication services (+1.5%); the Philadelphia Semiconductor Index jumped 3%.
- Meanwhile, the yield curve continues to flatten, with only one basis point now separating the two-year and 10-year yields after the former jumped 9 bps to 1.67% and the latter added 4 bps to 1.68%, but today's general risk-on mood helped the market overlook the continued compression in yields.
- U.S. September WTI crude oil settled +4% at $57.10/bbl, the highest finish for a front-month contract since July
Here was the mood of the market as we began a new day, however.
- Tariff relief led to big gains for Wall Street on Tuesday, though U.S. stock index futures are now pointing to losses of 0.5% as weaker-than-expected data from China and Germany dimmed the global outlook.
- Yesterday, the U.S. Trade Representative announced that fresh 10% tariffs, originally scheduled to go into effect Sept. 1, would be delayed until Dec. 15 for some consumer items, while other products are being removed from the new tariff list altogether due to "health and security factors."
- The U.S.-China trade war is also putting further pressure on the 10-year Treasury yield, which inverted overnight with the 2-year Treasury rate, a historic recession indicator.
- Down only modestly not long ago, U.S. stock index futures are now off about 1.3% across the board.
- That's coming alongside a big move down in Europe, with the Stoxx Index (NYSEARCA:FEZ) down 1.55%, led by more than 2% declines in Germany (NYSEARCA:EWG) and Italy (NYSEARCA:EWI). A popular ETF gauge: The Vanguard FTSE Europe ETF (NYSEARCA:VGK).
- Among economic worries: The U.S. 2-year/10-year spread this morning inverted for the first time since 2007, and German economic growth turned negative in Q2.
Weak Germany and China numbers.
- Japan +0.98.
- Hong Kong +0.08.
- China +0.42%.
- India +0.80%.
- London -0.56%.
- Paris -0.88%.
- Frankfurt -0.90%.
- Europe's largest economy contracted by 0.1% in the second quarter as global tensions put pressure on its export-driven manufacturing sector.
- Speaking before the widely-anticipated fall was published, Chancellor Angela Merkel said the economy was entering a "difficult phase," adding, "we will react depending on the situation."
- A closely-watched survey of investors yesterday found German economic sentiment had plummeted to its lowest level since the eurozone crisis in 2011.
- DAX -0.5% to 11,696.
- A seasonal slowdown and trade tensions saw China post its weakest industrial output growth since 2002, which rose 4.8% in July from a year earlier, adding to the case to roll out more stimulus.
- Retail sales also slumped, while fixed-asset investment slowed further.
- Push for trade talks? Following the data - and a delay to the next tranche of U.S. tariffs - Chinese officials stuck to plans to visit Washington in September for face-to-face meetings.
- Shanghai +0.4% to 2,809.
Hong Kong not helping.
- Trading in the iShares MSCI Hong Kong ETF (NYSEARCA:EWH), the largest fund tracking Hong Kong stocks, jumped to a five-year high on Tuesday, with 25M shares trading hands in New York.
- As riot police clashed with pro-democracy protesters and the Hong Kong airport returned to calm, EWH ended the session in the green, though the $1.4B fund has lost about 40% of its assets since June.
- Tensions are still running high, with President Trump stoking fears yesterday about a possible intervention with Chinese troops massing at the border.
- With the 2-10 yield curve inverting for the first time since 2007 and the 30-year Treasury declining to a record low, iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) rises 2.0% in premarket trading, and the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) sinks 4.2%.
- The 10-year Treasury yield falls 11 basis points to 1.595% slipping below the 2-year Treasury yield of 1.604%, which is down 7 basis points.
- Bond prices are rising as investors put their money into safer investments, pushing yields lower, and triggering a recession warning. Weaker-than-forecast Chinese retail sales and industrial production and a contracting German economy contributed to the narrative of a softer global economy.
- The 30-year Treasury yield fell as low as 2.016%, a record low.
- The inversion isn't unique to the U.S. The U.K. 10-year Gilt yield at 0.456% falls below the 2-year Gilt yield of 0.459%.
- ETFs: TLT, TBT, TMV, TBF, EDV, TMF STPP, FLAT
- The biggest U.S. banks fall in premarket trading as the 10-year Treasury yield fell below the 2-year Treasury rate overnight, a closely watched recession indicator.
- Bank of America (NYSE:BAC) slides 2.6%, Citigroup (NYSE:C) sinks 2.5%, Morgan Stanley (NYSE:MS) drops 1.8%, Wells Fargo (NYSE:WFC) slips 1.7%, Goldman Sachs (NYSE:GS) falls 1.5%, and JPMorgan Chase (NYSE:JPM) is off 0.9%.
- RBC analyst Lori Calvasina, though, writes that she's keeping financials "overweight for the day when economic expectations start to firm up."
- Suggests investors retain some cyclical exposure, with financials offering the most opportunity and notes "compelling valuations" against the broader U.S. equity market.
- RBC upgrades large cap REITs to overweight from market weight, noting sector continues to outperform amid low risk from China trade war and 2020 election, solid ETF inflows, and high dividend yields.
- The firm lists REITs that "should perform well in an uncertain environment": Alexandria Real Estate Equities (NYSE:ARE), American Tower (NYSE:AMT) +0.8%, Americold Realty Trust (NYSE:COLD), HCP (NYSE:HCP), Mid-America Apartment Communities (NYSE:MAA), Prologis (NYSE:PLD), QTS Realty Trust (NYSE:QTS), and Regency Centers (NASDAQ:REG).
A rush to refinance.
- MBA Mortgage Applications
- Composite Index: +21.7% vs. +5.3% (W/W).
- Purchase Index: +2.0% vs. -2.0%.
- Refinance Index: +37.0% vs. +12.0%.
- 30 year mortgage rate remains at 3.93% vs. 4.01%.
Will the U.S. see negative rates?
- Nothing is stopping the U.S. from getting sucked into the global trend of negative yielding debt, former Fed Chairman Alan Greenspan told Bloomberg, adding that "zero has no meaning, beside being a certain level."
- With global central banks engaging in unprecedented monetary easing, a record $15T of government bonds worldwide now trade at negative yields.
- The U.S.-China trade war is further putting pressure on the 10-year Treasury note, which nearly inverted on Tuesday with the 2-year Treasury note, a historic recession indicator.
Does anyone shop at Macy’s anymore?
- Macy's (NYSE:M): Q2 Non-GAAP EPS of $0.28 misses by $0.17; GAAP EPS of $0.28 misses by $0.15.
- Revenue of $5.55B (-0.4% Y/Y) in-line.
- Shares -7.28% PM.
- Macy's (NYSE:M) falls after the department store operator lowers its full-year profit forecast.
- The company guides for FY20 EPS of $2.85 to $3.05 vs. $3.05 to $3.25 prior and $3.07 consensus. Macy's says the EPS guidance doesn't reflect the fourth tranche of tariffs on goods from China. The company is evaluating the details of the tariffs and is actively working with its vendor partners and suppliers in China to help mitigate potential impact.
- Macy's management points to a slow sell-through of warm weather apparel and the "accelerated decline" in international tourism as negative factors.
- Shares of Macy's are down 12.25% premarket to $17.01. Kohl's (NYSE:KSS) is down 5.27% and Nordstrom (NYSE:JWN) is off 3.85% in the early session. J.C. Penney (NYSE:JCP) is 3.24% lower and TJX Companies (NYSE:TJX) has peeled off 2.35%.
- U.S. department stores are on pace to see an even larger drop in sales this year than the 20% decline recorded in 2018, according to information from the U.S. Census Bureau.
- There was some thought that sales would hold up this year or at least fall by a lower percentage as chains modernized their concepts.
- Analysts don't expect private equity firms to ride in to bail out the survivors in the sector, instead go-private deals from companies with a high level of inside ownership are seen as more likely. Nordstrom (JWN +1.9%) and Hudson's Bay (OTCPK:HBAYF) are two chain where those efforts are already underway. The answer at Kohl's (NYSE:KSS), J.C. Penney (NYSE:JCP) and Macy's (NYSE:M) could be trickier. On a year-to-date look, JCP is down 43% and Macy's is off 35%, while Kohl's has peeled off 26%.