New Year’s Party Interrupted: Middle East Tension Injects Fear As Crude Spikes
TD Ameritrade | Jan 03, 2020 01:43PM ET
(Friday Market Open) One of the potential threats many people pointed out looking ahead to 2020 was geopolitical instability.
What they might not have expected was for it to happen so suddenly here at the start of the year.
Last night’s U.S. action in the Middle East sent crude prices spiking. Stock futures tumbled, giving back basically all the gains from Thursday in pre-market trading early Friday. Crude is back where it was in September after the attack on Saudi oil facilities, up above $63 a barrel. Iran has vowed to retaliate, so investors might be on tenterhooks waiting for that.
Volatility, which dropped sharply Thursday, scurried quickly back above 15 for the Cboe Volatility Index (VIX).
One thing investors don’t want to do here is panic. Making moves out of fear isn’t a strategy. Instead, it’s often better to be prudent and let things play out. Sometimes these geopolitical situations seem scary and threatening at the start but don’t end up having a major long-term impact on markets. For instance, the situation in North Korea a couple of years ago, or the attack on Saudi Arabia last year.
In the meantime, however, it’s not surprising to see what some people call a “flight to safety” taking place early Friday, though no investment is really “safe.” The 10-year U.S. Treasury note gained ground, pushing its yield down to 1.82%. That’s compared with above 1.9% just 24 hours ago. Gold jumped more than 1% and is at four-month highs near $1,550 an ounce. The dollar is also on the rise.
In the stock market, it wouldn’t be surprising to see the so-called “defensive” sectors like Utilities and Staples that got slammed yesterday come roaring back today.
Crude’s path could be especially interesting. This is the fifth consecutive week crude prices have risen, U.S. prices are up 8.8% from month-ago levels, and are up 32.9% from levels seen a year ago. Remember, one-fifth of all oil flows through the Strait of Hormuz. Any long-term gains in crude could start to eat into company profits across many sectors, and also could threaten consumer sentiment.
h3 2020 Or 2019?/h3To paraphrase an old song: Meet the new year; same as the old year. At least that’s how it felt before Friday’s sharp pre-market drop following the Middle East instability.
With a rally Thursday that likely reflected followthrough from December’s sharp gains, the major indices had one of their best starts to the year in a while. The big names that dominated December rose to the top again on Thursday, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and the big chipmakers. Technology-led all sectors in 2019, and finds itself in a leadership role 48 hours into 2020.
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Only Industrials outpaced Technology on day one, with shares of Lockheed Martin (NYSE:LMT), General Electric (NYSE:GE), Boeing (NYSE:BA) and Caterpillar (NYSE:CAT) all surging as Chinese manufacturing data for December didn’t fall out of bed and the Beijing government announced more stimulus. Hopes for revived economic health in China as the White House prepares for a Phase One trade deal signing might be helping bolster shares of Industrial companies doing business there.
McDonald’s (NYSE:MCD) also had a strong day, but CocaCola (NYSE:KO) shares stumbled to start the year. These two consumer names could be worth watching if the U.S. dollar remains weak, because their products would probably become more affordable for international customers. The dollar index perked up slightly to 96.80 on Thursday but remains near six-month lows. Remember, the downside to a weaker dollar can sometimes be rising commodity prices. If that happens, it might make things rough for companies like MCD and KO, since they’re reliant on commodities.
h3 Missing The Party/h3Not every area performed well Thursday, as small-cap stocks and some of the dividend-paying sectors got slammed. The Russell 2000 small-cap index (RUT) was down moderately at midday and came back by the close, but still fell slightly. Small-caps did OK in 2019, but got outrun by large-caps in 2019. Investors appeared to start 2020 unwilling to let go of that trade, Briefing.com noted.
The other twist Thursday was the strong performance of the bond and gold markets, which continued this odd pattern we’re in where cyclical shares do well along with “defensive” assets. The S&P 500 Index (SPX) momentum might have carried forward into 2020, but so did a precautionary stance some investors appear to be taking.
Some of this could potentially be explained by the fact that while China’s manufacturing data wasn’t too soft, it didn’t meet analysts’ expectations. Concerns that the stock market might be approaching “overbought” territory might also contribute to some of the defensive positioning in bonds and gold. That was before the attack on Iran’s military leader last night, which helped send bonds and gold even higher this morning.
h3 Data, Fed In Picture Today/h3There’s no payrolls report until next Friday (see more below), but the ISM manufacturing index comes out soon after the opening bell today and could be an impact player, especially if it looks weak. Anything below 50% in the headline figure indicates contraction, and last time out in November it was 48.1%. Analysts look for a slight improvement in December to 49%, according to Briefing.com’s consensus estimate.
Maybe keep an eye on auto sales today too as the December figures roll in. With earnings season straight ahead, a robust month for auto and truck purchases might point toward strong quarters for the financial industry as well as automakers and their sub-industries. Relatively low gas prices continue to lure many U.S. car buyers toward larger, more gas-guzzling vehicles, and that’s where many automakers pull in the most profit.
The Federal Open Market Committee’s (FOMC) minutes from its December meeting come out at 2 p.m. ET today, and could provide insight into the Fed’s decision last month to hold rates steady. It also could provide a little clarity into what FOMC officials think about the economic situation heading into 2020.
The minutes are likely to reiterate that policy and the economy are in a “good place.” That seems to be the Fed’s new mantra as it enters 2020.
FIGURE 1: A TALE OF TWO SECTORS: The Technology sector (IXT—purple line) charged out of the starting gate Thursday for the first session of the year, as this one-day chart shows. Utilities (IXU—candlestick) were a different story, plunging more than 1%. The strength in big-name Technology stocks that marked much of December appeared to carry into 2020, at least on day one. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Wait a Minute. It’s the first Friday of the month, so shouldn’t it be payrolls day? Not this time. Due to the holidays, the government won’t be releasing its December jobs report until a week from today, which means we’ll get another week of jobless claims data and today’s manufacturing PMI figure to digest ahead of the big report. Factory orders and the monthly trade balance data next week also could help analysts hone in on their predictions for jobs growth.
One thing they may already be assessing is the four-week average for new jobless claims, now at 233,250. That’s up 4,750 from a week ago and represents the highest four-week average since Jan. 27, 2018, Briefing.com noted. Claims are a leading indicator that can play into the ultimate monthly jobs and unemployment data. Does this mean analysts will be predicting any change in November’s 50-year low 3.5% unemployment rate? We’ll find out as estimates start coming in next week.
No Fed Fireworks Expected: Bond yields took a turn lower as the new year began, falling back below 1.9% for the 10-year Treasury yield. At this point, it seems unlikely that the bond market can develop the kind of momentum it gathered last year when the Fed said early on it would stop raising rates and then embarked on a 75-basis point rate cut over three meetings late in the year. Many analysts expect no further rate cuts this year, but they’re not looking for hikes, either. As of Thursday, chances of the Fed raising rates at its meeting late this month were just 6%, according to CME futures. Odds stood at more than 93% of the Fed doing nothing at the meeting.
Looking further into the year, the futures market puts odds of more than two-thirds that the Fed’s key borrowing rate will remain right where it is at between 1.5% and 1.75% into July, and even a 43% chance of it not changing the entire year. Odds are a little over 50% that the Fed will put through at least one rate cut in 2020, the futures market suggests, but chances of a cut don’t rise above 50% until December. Remember, the Fed’s easing in 2020 also gave stocks a decent tailwind, so there’s some thinking that without that, things might not be quite as exciting on Wall Street this year.
Trend Defied: It’s conventional wisdom that on days when bond yields come under pressure, stocks with high yields tend to benefit. That didn’t work out Thursday. Bond yields fell, but some of the dividend-paying stocks that often do well when bond yields plunge also took a trip to the woodshed. These names included Verizon (NYSE:VZ), AT&T (NYSE:T), and a lot of stocks in the Utilities sector. In fact, Utilities had the worst day of any S&P 500 sector, falling nearly 1.4%.
Weakness in the telecom stocks might relate to an article in The Wall Street Journal about 5G technology “underwhelming” in its first big test over in South Korea. It’s harder to say why some other dividend stocks didn’t perform, except that possibly many investors got excited by the big jump in Technology and Industrial names Thursday and piled in at the expense of the more plain-Jane dividend payers. If bond yields continue to ease, it could be worth looking to see if investors start gravitating toward Utilities, Staples, and Real Estate.
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