Trade-Deal Optimism Boosts Wall Street

(Wednesday Market Open) Optimism about a trade deal between the U.S. and China has ebbed and flowed in recent months. Today, it seems to be swelling, and in this case a rising tide lifts all freighters.

With talks between the world’s two largest economies continuing in Washington this week, hopes seemed high after a Financial Times report quoted Myron Brilliant, executive vice president for international affairs at the U.S. Chamber of Commerce, that a deal is 90% done. Also, White House economic adviser Larry Kudlow said on Tuesday that the two sides “expect to make more headway,” Reuters reported.

But before anyone gets too excited, Brilliant also said the last 10% is the hardest part. So, while things seem to have taken a nice step in the right direction, the devil is in the details, which Wall Street hasn’t seen yet.

An index that showed gains in China’s private sector also appears to be helping sentiment this morning, coming on the heels of solid manufacturing data from the Asian nation as well as the United States, which helped boost stocks on Monday.

If Monday’s strong U.S. stock performance was like a blowout basketball win, yesterday’s performance was like going for a layup or maybe just running out the clock.

The S&P 500 (SPX) was essentially unchanged near its highest levels since October while the Nasdaq (COMP) was up a touch and the Dow Jones Industrial Average ($DJI) fell a smidge. It seemed market participants wanted to take a breather following one of the best Wall Street performances of the year, with all the major indices up 1% or more and the SPX nearing a six-month high Monday.

The small nature of the moves in the major U.S. indices Tuesday seemed to indicate that there wasn’t too much profit-taking going on. There also wasn’t much follow-through buying from Monday, but that didn’t seem to be because of too much anxiety in the market as Wall Street’s main fear gauge, the CBOE Volatility Index (VIX), dipped for the fourth session in a row. It may be that investors and traders could be keeping their powder dry ahead of Friday’s jobs report.

Still, sobering U.S. durable goods data combined with news that Britain’s prime minister said she would seek a longer extension from the European Union to keep the market on its toes Tuesday. The deadline of April 12 is approaching, and British legislators have still not hammered out a deal to exit from the currency bloc.

The Brexit confusion has been an overhang to markets, as have unresolved negotiations between China and the United States on a deal to end the trade war between the world’s two largest economies.

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So it seems Tuesday’s news from across the pond served as a reminder that the global economy isn’t out of the woods yet, despite upbeat manufacturing data from the U.S. and China on Monday.

Demand for U.S government debt, considered a safe haven investment, rose on Tuesday, pushing the yield on the benchmark 10-year Treasury note lower (see figure 1 below). But it remained above the yield on the three-month Treasury bill, which also fell Tuesday.

Gold, also considered a safe-haven investment, rose slightly on Tuesday, despite gains in the U.S. dollar. The two often move inversely to one another as a stronger dollar makes dollar-denominated gold more expensive for those using other currencies. But as both are considered safe haven investments, worry about geopolitical events can increase demand for both at the same time.

Part of the problem for U.S. stocks Tuesday came from a downbeat report from Walgreens Boots Alliance (NASDAQ:WBA). The $DJI component missed third-party consensus earnings per share estimates, cut its 2019 outlook, and drew attention to “consumer pressures” in the United States and United Kingdom along with falling generic drug prices.

WBA shares dropped more than 12.8% while competing drugstore chains CVS Health (NYSE:CVS) fell 3.8% and Rite Aid (NYSE:RAD) dropped nearly 9%, with all three hitting 52-week lows.

Strong economic data on U.S. and China manufacturing sectors and construction spending in the U.S. that helped the market rally Monday met headwinds on Tuesday. Durable goods orders for February fell 1.6%, a greater decline than a Briefing.com consensus had expected, and January orders got revised downward.

It’s notable that a 4.8% decline in transportation orders helped pressure the headline figure for February, which was before the March 10 Ethiopian Airlines crash that resulted in the worldwide grounding of 737 Max jets made by Boeing (NYSE:BA) and clouded the future for orders of the plane. Even when not taking aircraft into account, non-defense capital goods orders fell by 0.1%.