Trade Fears Weigh Despite Positive Tesla Vibe

(Thursday Market Open) Trade fears are prowling again today, putting a negative spin on things as investors worry about the next phase in this ongoing battle between the U.S. and China. Basically, the mood of the market seems to reflect whatever the tariff mood is on a given day, and Thursday the concerns appear to be back.

The U.S. administration now threatens to slap 25% tariffs on $200 billion in Chinese goods. The original proposal had been 10%. At the same time, the two countries continue to negotiate and there’s a comment period that goes until Sept. 5, so nothing appears immediate. Still, judging from reaction in pre-market trading—where the Dow Jones Industrial Average fell more than 200 points—many investors remain nervous about possible economic consequences if the situation worsens.

Markets fell in Europe and Asia overnight, and the U.S. market seems to be following the same playbook. In overseas news, the Bank of England raised rates early Thursday, a possible sign of continued economic recovery. Keep in mind, however, that this is only the second time the bank has raised rates since the financial crisis a decade ago.

Before tariff talk hit the market, the buzz on Wall Street centered on Tesla (NASDAQ:TSLA). The automaker’s shares rallied 9% in pre-market trading after the company’s surprisingly good earnings report late Wednesday showed TSLA’s cash position improving slightly from a quarter earlier and as the company promised profitability in quarters to come.

TSLA’s Q2 loss was just a little worse than Wall Street analysts had expected at $3.06 a share. Third party consensus was for a loss of $2.76. Automotive revenue rose 47% from a year earlier, TSLA said, mainly because of Model 3 deliveries.

However, actual earnings arguably loom less important for the company than some other measures. Tesla had already reported its Q2 production numbers prior to earnings, so there was nothing new there Wednesday. Instead, what many analysts were looking for was a measure of how much money the company is spending. Some analysts had calculated that TSLA might eventually need to raise anywhere from $1 billion up to $10 billion over the next several years as it has continued to burn cash.

On Wednesday, the company said it had $2.2 billion in cash on hand at the end of Q2, and expects its cash reserves to grow in the second half of the year. This suggests the company isn’t burning through cash quite as quickly as some analysts had thought. Current assets rose to $6.699 billion and current liabilities edged up to $9.141 billion.

TSLA also now expects to spend less than $2.5 billion in capital expenditures in 2018. Cash outflow from operating activities as well as capital expenditures both improved from Q1, the company said in a press release. TSLA said it has “significantly cut back on capital expenditure” projections, partly by not adding new production lines for its Model 3.

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The Fed left rates unchanged Wednesday, as the futures market had expected. The Fed peppered its statement with positive language, using the word “strong” numerous times to describe the state of the economy and labor market, while adding that rates remain “accommodative” and inflation is at the Fed’s 2% target.

Futures prices now point to about a 90% chance of another hike by the time of the Fed’s September meeting, and a better than 66% chance of a fourth hike by the end of the year. However, the Fed didn’t really give investors much new insight Wednesday even as the market seems to be looking for some direction. This meeting felt like a placeholder, with the Fed having just raised rates in June and likely waiting to see more economic data before making any additional steps.

With the Fed not a big factor, markets had a mixed tone Wednesday as solid Apple (NASDAQ:AAPL) earnings helped lift the NASDAQ while the S&P 500 and Dow Jones Industrial Average both slipped slightly amid more tariff concerns. The White House continues to threaten China with new tariffs, and that might have weighed slightly on some multinationals. That said, the SPX managed to come back a little from its lows by the end of the session, and the financial sector helped lead it back. Financials rose just slightly for the day, but rallied after the Fed statement after initially taking a slight hit.

Aside from TSLA, earnings news Wednesday included wireless carrier Sprint (S), which reported adding 87,000 net postpaid phone subscribers in the most recent quarter. However, earnings seemed to get overshadowed by the proposed $26 billion merger planned between T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S). The companies are meeting in Washington with policy makers to make their case, according to media reports.

While adding subscribers sounds good on its surface, remember that these companies have gone through a lot of competition lately. That’s arguably been a good thing for consumers, because many wireless companies are now offering incentives to keep subscribers. However, that means having to give up some margin. So one school of thought is, yes, they’re getting new clients, but at lower and lower margins.

FIGURE 1: Outperformers: As this one-month chart shows, health care (blue line) and industrials (purple line) are two of the best-performing sectors recently, outpacing the broader S&P 500 (candlestick). 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.