- The markets are trying to find a way to cope with a man-made crisis
- US tech stocks are in recovery mode.
- US consumer stocks could be in focus as we lead up to consumer confidence later this week.
- The dollar sell off gathers pace
- UK: domestic factors boost the housebuilding sector
After the big sell off, comes a modest recovery. Monday’s price action was brutal. The sell off pushed the Nasdaq close to correction territory, and the index is down nearly 10% YTD. The Trump trade unwind has been brutal for stock markets, especially in the US, but the impact has not been even. For example, on the S&P 500, Tesla has fallen nearly 45% YTD and is the weakest performer on the index. In contrast, CVS Health Corp is higher by 45%. There is a clear preference for defensive sectors like healthcare in the US right now.
US tech stocks fall into no man’s land
The tech sector led the sell off on Monday, and it was down by more than 4%. Tech’s biggest hitters including Nvidia, Microsoft and Amazon are all below their 200-day smas. Apple is testing its 200-day sma, the S&P 500 and the Nasdaq 100 are both below their 200-day smas. This is problematic. There is a saying in financial markets that nothing good happens below the 200-day sma. Thus, it can be a self-reinforcing cycle: stocks fall below a certain level, this causes more people to sell, and the stock continues to fall. The US tech titans won’t fall indefinitely, it could take an external driver, like a pause in President Trump’s unorthodox economic policy, to see US stock markets get out of their current rut.
The S&P 500 is expected to recover at the open, and Nasdaq futures are also higher. European stocks are staging a tentative recovery early on Tuesday, although the recovery in Asian stocks was short lived. The market is awaiting direction from the US later today, and we may need to wait for Wednesday’s US CPI report before the market makes its next directional move.
President Trump’s man-made crisis
The problem for markets is that this is a man-made crisis. President Trump has elevated his political aims above the medium-term outlook for the economy. On top of this he is pursuing two disruptive political aims at once: 1, tariffs and 2, cutting the size of government. If he had chosen one clearly defined policy to start with then the markets may have adjusted better to Trump’s second term as president. Instead, the ‘bull in a china shop’ approach to economic policy has spooked investors. The question is, will it continue to spook consumers, the life blood of the US economy?
The University of Michigan consumer sentiment survey will be another key economic release this week and could determine how markets perform in the second half of this month. Consumer sentiment is at its lowest level since December, and the market is expecting another decline for March. The outcome of this survey is binary for financial markets: weaker US consumer sentiment could send stocks into another tailspin, while a pickup in sentiment could trigger a decent recovery.
US consumer stocks could lead the next sell off, as tech recovers
It is worth noting that Delta, the US airline, slashed its Q1 profit and sales forecasts on weaker domestic travel demand. It now expects revenues to rise by 5% in Q1, down from its previous forecast of 6-8%. It’s share price fell 5% on Monday and it is down a further 10% in the pre-market on Tuesday, which suggests that the sell off may not be over. If consumer stocks join the fray, then this could lead to a more dangerous phase of the US stock market sell off. Tech stocks are currently higher in the pre-market, Tesla is higher by 4%, after Monday’s 15% decline, while Nvidia is up by 2%. Overall, this is likely to be another volatile day for markets.
Dollar sell off shows no sign of slowing down
Elsewhere, bonds are giving back some of Monday’s gains, and European bond yields are slightly higher on Tuesday. However, Treasuries are still rising, yields are falling, albeit at a slower rate than yesterday. The 10-year US Treasury yield is back at 4.2%, close to its lowest level of the year so far. In the FX space, a weak dollar continues to dominate, and the DXY is at its lowest level since November. The precipitous decline in the dollar highlights how the FX market is different to the equity market. FX markets tend to grab onto one theme that persists for the long term. Thus, a weak dollar could be on the cards for some time. EUR/USD is surging this morning, and is back above $1.09, this makes $1.10 the next key resistance level. However, the strength of the downside momentum in the USD could see the euro strengthen further vs., the USD even after surpassing this key level.
UK house builders steal the show as we wait for government change to planning rules
While US recession risks are the key theme for markets right now, there are some UK specific drivers for the FTSE 100 today. Real estate is the best performing sector on the FTSE 100, and it is up nearly 2%. This comes after Persimmon, the house builder, has seen its share price pop more than 5% after it reported strong earnings and a decent outlook. The UK government is also expected to announce changes to planning legislation to speed up infrastructure projects, which is also good news for the construction sector.
UK retail sales growth was less than half the expected number for February, according to the British Retail Consortium. Sales rose by 0.9%, vs. 2% expected last month. This suggests that the UK consumer could be weakening, as we lead up to this month’s spring statement. This has not dented enthusiasm for the pound, and GBP/USD has surged above $1.29, and is marching towards the psychologically important level of $1.30.
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