Stocks Lower Amid Lingering Trade Uncertainty

November 20, 2019

 

U.S. are stocks lower in afternoon action, with the continued uncertainty surrounding a U.S.-China "phase one" trade deal hampering sentiment. In earnings news, Target and Lowe's offered upbeat earnings and guidance, limiting some of yesterday's drop that came courtesy of disappointing results from Dow member Home Depot and Kohl's. Meanwhile, news broke that GM filed a racketeering lawsuit against Fiat Chrysler Automobiles. Treasury yields are lower and the U.S. dollar is higher, with mortgage applications declining and the minutes from the Fed's October monetary policy meeting that delivered a third rate cut of the year coming later in the day. Gold is lower and crude oil prices are higher after yesterday's tumble. Europe finished mixed.

    

At 12:56 p.m. ET, the Dow Jones Industrial Average and the S&P 500 Index are down 0.4%, while the Nasdaq Composite is 0.3% lower. WTI crude oil is increasing $1.81 to $57.12 per barrel, Brent crude oil is trading $1.85 higher at $62.77 per barrel, and wholesale gasoline is $0.05 higher to $1.65 per gallon. The Bloomberg gold spot price is declining $4.72 at $1,467.74 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is ticking 0.2% higher to 98.00.

 

Target Corporation (TGT $125) reported Q3 earnings-per-share (EPS) of $1.37, or $1.36 ex-items, above the $1.19 FactSet estimate, as revenues rose 4.7% year-over-year (y/y) to $18.7 billion, above the projected $18.5 billion. Q3 same-store sales grew 4.5% y/y, topping the expected 3.6% gain. The company said its Q3 comparable digital channel grew 31% y/y, and its traffic rose 3.1%. TGT raised its full-year earnings outlook. Shares are rallying.

 

Lowe's Companies Inc. (LOW $118) posted Q4 earnings of $1.36 per share, or $1.41 ex-items, compared to the expected $1.35, as revenues dipped 0.2% y/y to $17.4 billion, below the expected $17.7 billion. Q3 same-store sales increased 2.2%, south of the forecasted 3.2% rise. The company noted that it was pleased with its U.S. home improvement store performance, which reflected a solid macroeconomic backdrop and continued progress in its transformation driven by investments in customer experience, improved merchandise category performance, and continued growth of its Pro business. LOW raised its full-year EPS guidance. Shares are solidly higher.

  

Urban Outfitters Inc. (URBN $25) announced Q3 EPS of $0.56, one cent shy of estimates, as revenues increased 1.4% y/y to $987 million, compared to the Street's forecasts of $1.0 billion. Q3 same-store sales rose 3.0% y/y, above the expected 2.8% increase, but its gross margin was below estimates and the year ago rate. The company noted that Q3 sales were driven by better reaction to its apparel assortments and strength in the digital channel. Looking ahead to Q4, URBN said it is encouraged by positive sales-to-date but realize its highest volume days have yet to be written. Shares are down over 10%.

 

General Motors Company (GM $36) has filed a lawsuit against Fiat Chrysler Automobiles NV(FCAU $16) and its former executives alleging racketeering and bribery of United Autoworkers Union (UAW) officials to procure more favorable terms in labor negotiations. GM claims that FCAU "corrupted" the collective bargaining agreements between it and the UAW in 2009, 2011 and 2015 by shelling out millions of dollars in bribes. In a statement, the automaker said that FCAU "was the clear sponsor of pervasive wrongdoing, paying millions of dollars in bribes to obtain benefits, concessions, and advantages in the negotiation, implementation, and administration of labor agreements over time." FCAU has not commented on the lawsuit. Shares of both automakers are lower.

 

Mortgage applications decline, ahead of look at Fed meeting details 

 

The MBA Mortgage Application Index declined 2.2% last week, following the prior week's 9.6% jump. The decrease came as a 7.7% drop in the Refinance Index more than offset a 6.7% gain for the Purchase Index. The average 30-year mortgage rate fell 4 basis points (bps) to 3.99%. 

 

Treasuries are higher, with the yield on the 2-year note declining 2 bps to 1.58%, while the yields on the 10-year note and 30-year bond are dropping 3 bps to 1.76% and 2.22%, respectively. For a look at fixed income investing, check out Schwab's Chief Fixed Income Strategist Kathy Jones' commentary, The Bond Investors' Dilemma.

 

Later this afternoon, the markets will likely scrutinize the release of the minutes from the Federal Reserve's October monetary policy meeting, after which the Central Bank announced a third rate cut of the year but signaled a pause and raised the bar for inflation in regard to when it would consider deploying a rate hike campaign as discussed by Schwab’s Chief Investment Strategist Liz Ann Sonders in her article, Fed Cuts Rates as Expected … Three and Done or More to Come?.

 

As the stock markets recently broke out to post a string of record highs, Schwab’s Liz Ann Sonders discusses in her latest article, Shiny Happy People: Investors Cheering Stocks' New Highs, for the past near-two years we have been pointing out the confluence of uncertainties that have meant the market could "go either way"—including most obviously trade/tariffs, but also the related economic trajectory, Fed policy and geopolitical/political uncertainty. She adds that it has led to a wide trading range—the peaks and valleys of which have been driven as much by extremes in sentiment as they have by the changing dynamics of the underlying fundamentals. Liz Ann concludes that in light of that, and the extremes of sentiment we are witnessing again, investors should not view the market’s latest high with rose-colored glasses.

 

Europe mixed amid flared-up trade concerns

 

European equities were mixed, as the recent increase in optimism surrounding a U.S.-China "phase one" trade deal that has boosted the global stock markets and fostered a slew of record highs in the U.S. was tempered somewhat. The resurfaced trade uncertainty came courtesy of U.S. President Donald Trump's threat of increased tariffs on Chinese goods if a deal is not reached, and was further complicated by the U.S. Senate passing a bill supporting protesters in Hong Kong. The euro and British pound traded lower versus the U.S. dollar, while bond yields in the region were mixed. In light economic news, German wholesale price inflation unexpectedly dipped in October month-over-month. The auto sector, which has been hampered and a drag on the equity markets, gave back some of yesterday's modest rebound and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his article, Will The Crash in Autos Drive The End Of This Cycle?, discussing the question of how the last global economic cycle ended with a housing bust; will the bust in auto sales end this cycle? Jeff notes that this auto-led downturn may be less damaging to the global economy than the housing bust was 10 years ago, but automobile manufacturing still accounts for a sizable amount of production, debt, and jobs.

 

The U.K. FTSE 100 Index dropped 0.8%, Germany's DAX Index was down 0.5%, France's CAC-40 Index declined 0.3%, and Spain's IBEX 35 Index decreased 0.4%, while Switzerland's Swiss Market Index was up 0.2% and Italy's FTSE MIB Index gained 0.1%.

 

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