Wednesday, April 17, 2019, 12:31 PM, EST
- Chinese GDP, industrial production and retail sales all positive for the global growth story.
- Healtcare (hospitals and biotechnology) weaker again.
- U.S. mortgage applications fall 3.5% last week vs. a 5.6% decline last week.
- Trade balance was "less worse" at -$49.4 billion vs. -$53.4 billion.
- Fed Beige Book data will be released at 2pm today.
U.S. Stocks started higher today as widely watched Chinese economic data helped growth sentiment but turned lower on weakness in the Healthcare space. To set the stage, recall that German PMI data on March 22 caused the Dow to drop over 400 points, German 10-year Bunds to tick back below a 0% yield and the odds of a U.S. rate hike - or even multiple hikes - to spike. The trading reaction was of course due to concerns about global growth. Since then, China's efforts to stimulate its own economy have borne fruit, with some helpful data out of that country over the past few weeks. See more on China's stock market performance in the "Technical Take" below.
Widely watched China GDP, industrial production and retail sales all beat expectations this morning. GDP in that country rose 6.4% annualized in Q1 while Factory output rose 8.5% year over year and retail sales rose 8.7%. Bulls hope that China's growth can outweigh (and maybe help reverse) the weakness in the Eurozone. Highlighting the growth sentiment, U.S. Treasury initially yields rose, ticking to 2.61% on the 10-year and trading currently at 2.59% when stocks gave up gains. Oil also moved higher as crude inventories fell more than expected but then fell below $65.
Something is going on in the Healthcare space and this dragged stocks lower after the open. Managed care stocks like hospitals and nursing homes have been pressured by an increased discounting of "Medicare for All" risks to their business. And biotechs have been down for the seven out of the past eight trading sessions, with the Nasdaq Biotechnology Index currently lower by more than 3%, and on pace for the sharpest daily decline since the aforementioned March 22nd. Healthcare is the worst performing sector this morning, down over 2% as we write. Real estate, Financials and Materials are also in the red with the remaining seven sectors in positive territory. In tech, AAPL and QCOM have settled their lawsuits against one another and INTC announced it's exiting the 5G smartphone business to concentrate on network infrastructure and data. All three stocks were higher pre-open and generally what's good for tech is good for the market.
As earnings season starts to get warmed up, PepsiCo and Morgan Stanley reported results, with both stocks trading higher in the early going and holding on to gains so far. Bank of NY and US Bancorp also reported and traded lower with BK missing on net interest income & revenues and cautioning that the yield curve would pressure earnings in future quarters.
In our big picture earnings segments this week so far we've covered Wall Street's earnings expectations for Q1 and some of the factors companies have cited in the few reports so far. Top line growth is another important element to earnings season. Part of the reason the market is not reacting more negatively to the low earnings growth expectations is the fact that revenue growth is still looking positive with estimates ranging between 4.3% and 4.8% for all four quarters in 2019. Wall Street can be more patient with a margin problem than a broader macro revenue problem.
For the first quarter, the Fed's dramatic change in posture towards rate hikes has allowed equity holders to look further into the future for growth. Revenue growth for Q1'19 is expected to be 4.8%, which is slightly above the 4.6% expected last week. According to FactSet if 4.8% ends up being the final growth rate, it will be the lowest since Q3 2016 (2.7%). That said, only two sectors are expected to report revenue declines: Energy and Information Technology. Tech of course has a big weight in the S&P 500. Communications Services and Healthcare are expected to post double digit revenue growth rates. See the chart below for details. Tomorrow we'll get into expectations for Q2 and beyond.
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Brian's Technical Take
Today China reported better than expected economic data showing its economy grew by 6.4% YoY in Q1. Factory output jumped 8.5% in Q1 which also came in above forecasts. Afterwards brokers raised their expectations with UBS increasing its FY 2019 GDP forecast to 6.4% from 6.1%, and Morgan Stanley going to 6.5% from 6.3%.
China's economy is certainly in the early stages of recovering from the 2018 global economic slowdown, however its equity markets have been leading the rebound in asset prices for most of 2019. The Shanghai Composite (SHCOMP) made a new 52-week low back on January 4th as U.S. benchmarks were in already rebounding from their December lows. Just one week later in the January 11th MIDDAY UPDATE we noted the SHCOMP's improving technical setup and its potential for a strong upside breakout with accelerating long term momentum.
Specifically we noted the large "double bottom" price pattern that formed over the prior three months with the lows made in October and January. At the latter January lows the SHCOMP formed bottoming candlestick patterns, "spinning top" and "hammer" sticks, during consecutive weeks over the weekly time frames. The monthly secular outlook showed the January lows taking place at a rising support line connecting the cyclical lows of 2005 and 2013. And finally momentum then showed a great deal of promise with the weekly RSI (i) forming a bullish divergence at the January low, and (ii) on the cusp of breaking out from a 10-month triangle pattern. Almost immediately a breakout from declining price channel ensued and the momentum was unleashed.
Since January 11th the SHCOMP has rallied more than 27% and is one of the top performing global indices with a YTD gain of 34.5%. The weekly RSI has jumped from 40 to an extreme bullish reading of 75.
Over the near term the Chinese index could be in store for some consolation. While the SHCOMP gapped higher at the start of last week to fresh YTD highs, it finished at the midpoint of the prior week's range to form a "dark could cover" pattern. Consolation from here would not be a bad thing in order to work off overbought technicals. A retracement in price should see firm support down at the psychologically important 3,000 level where also a price gap exists at the 2,985 - 3,008 range. Gaps are notorious for acting as future levels of support and resistance.
While the economic data has a lot left to prove and the trade deal with the U.S. still up in the air, price has bene telling us for some time now that the global recovery is well underway. Stay with the trend.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.