Pedestrians walk past clocks in the Canary Wharf financial, shopping and business district in London, U.K. (Photographer: Simon Dawson/Bloomberg)

Ticking Down the Hours Until Trade War Ignites: Taking Stock

(Bloomberg) -- Stock futures are getting whacked and the VIX is climbing (now at ~19) as the market diverts its attention from the Fed toward the big announcement on China tariffs. A lighter euro-zone PMI print isn’t helping matters either. 10-year yields have pulled back to ~2.85% vs yesterday’s post-FOMC peak of 2.93%, the dollar is up slightly from its lows, and Facebook is off more than 2% as Zuckerberg’s public apology gets dissected.

A Market-Friendly Fed

New Fed chief Jay Powell did a respectable job of not overly spooking the market. In fact, multiple macro gurus pointed out some under-the-radar dovish signals from the statement, especially the core inflation outlook, and came away with the gushy feeling that this is a market-friendly Fed.

  • JPMorgan’s Marko Kolanovic: Fears of a hawkish message didn’t materialize. There was no significant change in inflation expectations and growth outlook, alleviating recent stock market concerns. "This outcome is a positive and indicates that equity investors could expect a near term goldilocks environment"
  • Rafiki Capital’s Steven Englander: If central tendency is >2% for two years, it means that the typical FOMC participant isn’t worried about a temporary overshoot. "This is very dovish and asset markets have not yet reacted fully to the dovishness."
  • Societe Generale’s Bruno Braizinha: FOMC statement and summary of economic projects reflect a Goldilocks scenario, though judging by the movements in stocks and the rates space, "the market does not seem to be entirely convinced"

Igniting a Trade War

But Fed Day is over and it’s time to move on to the next thing that could derail this market, and that may hit midday, or 12:30pm Eastern time to be exact. This is when President Trump is scheduled to sign a memorandum "targeting China’s economic aggression," thereby lighting the match that may ultimately ignite a full-blown trade war.

Our latest story says that Trump will impose ~$50 billion of tariffs against China; this reported figure has been a swinging pendulum over the past week, climbing to $60 billion one day and $30 billion another. Net net, the market hasn’t taken the bait like it did with the steel tariffs, meaning that the response has been relatively tepid.

Look at the action in Boeing (currently down over 1% pre-market) -- BA might be the most important proxy for trade war tensions, especially when it comes to China, but the stock has shown much resiliency. It is the top performer in the Dow this week and has surged 14% YTD -- miles ahead of S&P 500 +1.4% and S5INDU +0.7% -- and ~90% in the past year. Perhaps much of this China tariff stuff is baked in, or maybe there have just been too many other things to worry about and the reaction will start to percolate over the next week or so.

Morgan Stanley has a note out today on BA this morning - they have an equal-weight rating (neither buy nor sell), but they believe that the "dynamics around these trade disputes and international relations appear manageable for earnings and cash flow." Volatility is no doubt expected to continue for the near term, but they acknowledge that a potential buying opportunity in shares is brewing as we get more clarity on policy, and assuming it isn’t disruptive.

Three Earnings That Matter

Not that other companies’ earnings don’t matter, but there are several reports today that should have important read-across for their respective sectors.

  • ConAgra -- Consumer has a slew of names hitting the tape before the open (like DRI for restaurants, CCL for cruise lines, MIK & GIII for retail), but CAG may be the most important after the thrashing in staples land yesterday. S5CONS hit a 14-month low after GIS cited cost inflation for a disappointing quarter and slashed forecast; GIS was the latest victim of a whole string of peers that have called out similar headwinds.
  • Nike -- Speaking of consumer, after the bell we’ll get NKE earnings, which should move athletic and footwear peers like UA, LULU, SKX and FL (whose weak comp sales a few weeks ago pulled the sector down). The sell-side notes cautious sentiment into the print, so all eyes are on outlook for North America and comments on innovations. 
  • Micron -- One of the most impressive stories in the market is MU, which is up nearly 50% year-to-date and handily outpacing the impressive ~12% climb in the SOX. The sell-side has been overly gracious in the past week, with two analysts slapping $100 targets on this one (implying upside of more than 60% from here), but the question is what will the bulls need to see on top of the expected beat-and-raise to keep the rally going.

Tick-by Tick Guide to Today’s Actionable Events

  • 6:45am -- CMC earnings
  • 6:59am -- ACN earnings
  • 7:00am -- DRI, MIK, GIII earnings
  • 7:30am -- CAG earnings
  • 8:00am -- BoE rate decision
  • 8:30am -- Initial Jobless Claims
  • 9:15am -- CCL earnings
  • 9:45am -- Markit Manufacturing PMI
  • 10:30am -- Natural Gas storage data
  • 10:45am -- Markit Services PMI
  • 12:30pm -- Trump scheduled to sign China tariffs memorandum
  • 4:00pm -- MU earnings
  • 4:05pm -- KBH, HOME earnings
  • 4:15pm -- NKE, CTAS earnings
  • 8:00pm -- Samsung annual meeting
  • Tonight -- Dropbox (DBX) IPO pricing

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