U.S. stock indexes are positioned to start a holiday-shortened week with gains, taking cues from relative stability in Chinese markets even as China's August trade data further exposed the challenges facing the world's second-largest economy. Why does weak data inspire? Most likely, say industry analysts, because numbers of this nature could keep Chinese officials injecting stimulus into the economy, and by default, into its stock market.
Markets like a vitamin boost-just look at how U.S. interest-rate accommodation fed record markets for a long stretch that only faced a true test in recent weeks.
Moving forward, U.S. gains could be hard fought after the broad S&P 500 (SPX), in figure 1, the blue-chip Dow Jones Industrial Average ($DJI), and the tech-heavy NASDAQ Composite (COMP) each fell about 3% last week-the start of historically volatile September. The choppiness begs the question: Will China dominate the investing landscape, or will the mid-month Federal Reserve meeting influence U.S. traders in the coming sessions? The reality-there's room for both drivers. Toss in Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN) product buzz. There's no shortage of potential news forthcoming.
Chinese shares in Hong Kong climbed for the first time in seven days. The Shanghai Composite Index slipped between gains and losses but ultimately rose even as Chinese officials said foreign exchange reserves fell by a record $94 billion in August. Reserve fell as the central bank attempted to steady the yuan after its surprise devaluation. Overall, exports fell 5.5% after a drop of 8.3% in July. Imports slid 13.8% in August.
Even with such "good" news, volatility clearly has a grip on the global stock market (figure 2). Japan's Nikkei shed 2.4% to 17,427 on Tuesday, its lowest level since February. The broad measure is now negative for the year.
U.S. Treasuries declined as their safe-haven reputation wasn't a strong draw just now. Demand waned because of uncertainty heading into next week's gathering of the Fed powers that was once seen as a near-lock to deliver the first U.S. interest rate hike in nine years. But now, soggy global growth led by China, the widespread retreat in stocks, and commodities weakness complicate Fed decision-making.
Much of Wall Street is unconvinced that the Fed is ready to move. Last Friday's August jobs report did little to tip the argument one way or the other. Still, a bias toward higher U.S. rates, especially relative to the rest of the world, persists. Against that backdrop, the dollar started the week higher against most major counterparts.
Figure 1: Holding 1900. The S&P 500 (NYSEARCA:SPY) fell Friday as traders exited for a three-day holiday weekend in the U.S. Last week's action shaved another 3% from the benchmark index but the psychologically important 1900 line held. Beyond that mark, support lies at 1,870 and then 1,790. Data source: Standard & Poor's. Chart source: TD Ameritrade's thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Figure 2: VIX Moves Narrowing. The CBOE Volatility Index (VIX), the market's "fear gauge," remains above 25. Can it hold? VIX is logging smaller intra-day moves in recent sessions. Data source: CBOE. Chart source: TD Ameritrade's thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
The Apple Show
If there's one individual stock that can grip the entire market with news, it's Apple (AAPL). The tech giant is an early gainer Tuesday, a day before its September 9 hardware event that industry analysts believe could unveil the iPhone6S and iPhone 6S Plus.
There's also industry buzz around an expected tricked-out Apple TV with Siri capabilities. But according to news reports, a larger iPad and an Apple streaming-TV package may be on hold until next year depending on which Apple analyst you ask.
Stay tuned, Apple muscle can influence much beyond its own share price.
In the same space (sort of), Amazon.com (AMZN) is making news on reported plans to release a cheaper $50 tablet with a 6-inch screen, in time for this year's holidays. According to The Wall Street Journal, the release-likely to scrimp on screen quality and battery life-would be one of the least-expensive tablets on the market and half the price of the company's current Fire HD 6-inch tablet.
The $50 device is part of a slate Amazon is planning to release this year that will also include tablets with 8-inch and 10-inch screens, according to the WSJ, which cited unnamed people familiar with the rollouts.
Sprinkling of Earnings
This week's earnings calendar is fairly light. Friday's release from grocery chain Kroger (NYSE:KR) is the only S&P 500 name on the docket.
Before then, retailer Men's Wearhouse (MW) is due to report on Tuesday, while home builder Hovnanian (NYSE:HOV) issues results on Wednesday, and workout wear company Lululemon Athletica (NASDAQ:LULU) opens its quarterly books to Wall Street on Thursday. Let's see if any company commentary starts to touch on the latest global economic growth concerns.
Wall Street is wondering how big a bite into current-quarter earnings could come at the hands of slowing emerging market growth and a stronger dollar. Analysts surveyed by Thomson Reuters expect a consensus 3.4% decline in earnings for companies listed in the S&P 500 for this quarter.
S&P revenue is expected to fall 2.8% for the quarter, with the most noticeable drop in the energy and materials sectors. Current expectations from the Thomson Reuters survey are for a 62% earnings decline and a 33% revenue drop in the energy sector. Those analysts expect the materials sector to report an 11.8% earnings decline, pinned largely on falling commodities prices. And, those analysts expect earnings for industrials, which have big overseas exposure, falling 4.9% and revenue falling 5% in the current quarter compared to a year earlier.
Revenue remains a key metric this year as analysts and companies have widely adjusted profit and loss figures. For their part, analysts have pared back their expectations. Companies have delivered cost-cutting and share buybacks to pretty up those bottom lines. That means top lines could be a better lens on the state of the stock market and the global economy.
Figure 3: Economic Agenda. This week's U.S. economic report calendar. Source: Briefing.com.
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