Wary Eyes Stuck on News as S&P 500 Futures Show Break From Pain

(Bloomberg) -- A positive start for U.S. stock futures provided a respite for traders after the market’s worst drubbing in two years. They speculated this week couldn’t be worse than the last one, but weren’t sure.

“It all depends on the news out of the White House, and there some hope that they’re going to appease the investors,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. “The markets will have to get used to the idea of uncertainty when it comes to trade. If everyone keeps their heads cool, maybe we could get by without a significant damage.”

Equity futures rose in New York, signaling a reprieve after a harrowing week amid the threat of a trade war. Contracts on the S&P 500 gained 0.8 percent at 6:50 a.m. in London, as investors weighed whether the Trump administration would follow through with tariffs. The underlying index lost 6 percent through Friday, the worst week in more than two years. Nasdaq 100 Index futures climbed 1 percent after technology investors were battered by the steepest rout since 2015.

Wary Eyes Stuck on News as S&P 500 Futures Show Break From Pain

The risk-off mood mellowed as investors speculated President Donald Trump and China will step back from the brink of trade spat. U.S. Treasury Secretary Steven Mnuchin eased concern after he told Fox News that he’s “cautiously hopeful” the two will reach a deal to avoid tariffs and South Korea struck an agreement on steel levies over the weekend.

Investors remain concerned that protectionist rhetoric will turn into trade policy that will disrupt the global economic rebound that’s fueled corporate earnings growth. Analysts have so far been quiet on what will happen to corporate profits amid the trade chaos. The first-quarter reporting season will start in less than three weeks.

Before then, investors will have to contend with the quarter’s final week, one that sometimes brings heavy volume as money managers rebalance their portfolios. The Good Friday holiday on March 30 will truncate the period in many markets. And in the background is rising angst that the surge this year in a key short-term dollar-financing indicator may be down to more than just structural issues.

At the same time, bond traders will be tested this week as the Treasury will probably auction about $294 billion of bills and notes, the largest slate of supply ever. China last week did not rule out scaling back its purchases of U.S. debt as part of its response to proposed tariffs. The 10-year yield held near 2.81 percent.

“I don’t think that long-term the tariffs will continue to be enforced,” Scot Lance, managing director at California-based Titus Wealth Management, said by phone. “They’ll pull them off the table at some point, I just don’t know if that will be a week, a month, a quarter? Could it last a whole year? I don’t necessarily think it’ll last for a long time.”

All of the uncertainty has kept the once-reliable dip buyers on the sidelines this time. Consider: The S&P 500 has closed lower than the midpoint of its daily range for 10 straight days, the longest stretch since at least 1982. That suggests traders are finding reasons to dump shares in the afternoon rather than buy dips.

There’s more than just the trade dispute weighing on equities. Facebook’s latest data woes sent that stock to a 14 percent rout last week. Fear that the news will spark tighter government regulation rattled megacap techs, with Apple sinking 7.4 percent and Alphabet dropping 9.5 percent.

The Federal Reserve’s signal that under new Chairman Jerome Powell it would largely maintain continuity with Janet Yellen’s gradual path buoyed Treasuries, but sent a shock wave through the banking sector, where investors had been anticipating higher lending rates. Bank of America Corp., the best-performing big bank stock since Trump’s election, tumbled 9.3 percent this week.

And sectors that would be hardest hit by a trade spat also got slammed. Industrial and material companies fell at least 5 percent. 3M Co. sank 9 percent and General Electric Co. tumbled 8.7 percent for the steepest drops in the Dow Jones Industrial Average. Every one of the 30 blue chips ended lower for the period as the index sank to a four-month low.

“It was the week when one bad thing led to another, it was a perfect storm,” said Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management. “You took the starch out of the FANGs, you saw banks, industrials, discretionary companies reacting to negative news. What investors are not pricing in is a potential impact on companies’ profit margins.

©2018 Bloomberg L.P.