Trade Uncertainty Weighs On Wall Street As Earnings Season Heats Up

(Thursday Market Open) If there’s one thing the market doesn’t like, it’s uncertainty. But that’s what it seems to be getting on two major fronts: the trade dispute between the U.S. and China and corporate earnings.

The worries about the U.S.-China trade situation continued after President Trump said “there’s a long way to go” on China trade talks as The Wall Street Journal reported that progress toward a deal between the world’s two largest economies has stalled over restrictions on Huawei Technologies.

But Treasury Secretary Steven Mnuchin told CNBC that Huawei wasn’t a sticking point. He said a call between U.S. and Chinese officials was set for today and could lead to in-person meetings. Still, Mnuchin said “there are just a lot of complicated issues,” so it doesn’t seem like a deal is imminent, meaning that the biggest headwind facing Wall Street seems set to continue for an undetermined amount of time.

With that uncertainty lurking in the background, earnings season is heating up, and investors have been less than impressed with some early results.

In FAANG news, Netflix (NASDAQ:NFLX) reported stronger-than-forecast earnings but missed on revenue. Perhaps more importantly, the streaming giant said it lost 126,000 domestic paid subscribers and only added 2.83 million international paid subscribers when Wall Street was expecting many more. Its shares were down more than 11% in early trading this morning.

Meanwhile, International Business Machines (NYSE:IBM) posted stronger-than-forecast earnings. But its year-on-year revenue fell for the fourth consecutive quarter as its Global Technology Services segment sales missed expectations even as its Cloud and Cognitive Software unit beat estimates.

Morgan Stanley (NYSE:MS) beat on earnings and revenue, but its equities trading business and fixed income trading revenues came in below estimates.

It seems that the gray zone on tariffs may be putting a dent in the trading environment for banks, even as the unknowns on the trade front make the sales environment difficult for other companies. Still, the market remains near all-time highs as some companies beat low expectations.

The market yesterday seemed to focus on the negative after rail company CSX (NASDAQ:CSX) missed analysts estimates for earnings and revenue. The company’s shares declined more than 10% and were poised for more losses in pre-market trade today. Perhaps more worrisome was that the company trimmed its sales guidance, and its CEO said the current economic environment is “puzzling.” (See more below.)

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CSX’s woes, compounded with the latest news reports on the tariff talks stalling, are a reminder that the tariff situation with China hasn’t gone away. It remains arguably the biggest threat to corporate earnings and the broader economy as concerns about global growth continue to weigh.

With the economic bellwether Transportation sector not doing well amid worries about the global economy as the trade situation drags on, investors moved into the relative safety of U.S. government debt, pushing yields lower. It seems weaker-than-expected housing starts and building permit data from the U.S. market also encouraged Treasury buying.

Still, not all is doom and gloom, and there have been bright spots, such as the bumper jobs report we saw recently. So you could be forgiven if, along with CSX’s CEO, you’re puzzled by the current state of things.

In its Beige Book, a report summarizing anecdotal business reports, the Fed on Wednesday said that U.S. economic activity from mid-May through early July continued to expand at a modest pace, despite worries about trade. “The outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty,” the Fed said.

At the same time, the trade situation and its effects on economic growth are behind the Fed’s anticipated rate cut later this month, something that has given the stock market a shot in the arm recently.

While the futures market has been reflecting an increasing probability of a rate cut of 50 basis points in the Fed funds rate, that may be more wishful thinking on the part of some market participants. With the market and consumers seeming to be pretty healthy, it seems more likely that the Fed will be more conservative and issue a 25-basis-points rate cut.

In one sign that the consumer is healthy, Amazon (NASDAQ:AMZN) said its Prime Day went well. (See more on that below.) And several banks that reported this week, including Bank of America (NYSE:BAC), have been seeing strong consumer demand.

Meanwhile, United Continental (NASDAQ:UAL) beat expectations on both earnings and revenue, and the company raising guidance. That presented a bright spot for transportation, as UAL finished in the green while the Dow Jones Transportation Average dropped nearly 3.6%.

Crude oil prices were modestly bouncing back this morning after having a rough week, up about 0.7% at near $57.15 per barrel after Iran seized an oil tanker it believed was smuggling crude. The sudden increase lifts prices from two-week lows, as prices sagged in part because U.S. crude supplies fell recently, but by less than expected. Crude stockpiles were down about 3.1 million barrels for last week, when third-party analysts expected them to fall by 4.2 million barrels.