Nike And Powell In Spotlight, But European Virus Fears Could Be Sharing Stage

Key Takeaways:

  • Powell testimony to Congress could put focus back on monetary policy
  • Nike NKE reporting after close with its online sales, China business in focus
  • Keeping an eye on “mega-cap” stocks after their late surge Monday

Will it be Powell and Nike (NKE) to the rescue after Monday’s steep slide? Stay tuned to find out.

Fed Chairman Jerome Powell is up on Capitol Hill later this morning and NKE reports earnings after the close. Both could provide welcome distraction from what’s turning into the worst September in 18 years. The S&P 500 Index (SPX) briefly fell into 10% correction territory intraday Monday.

The question is what, if anything, could help this market find some footing. The fact that the Nasdaq NDAQ (COMP) stormed back from its lows late yesterday and the SPX managed to bounce off of a key support level near 3240 both could hint toward something better. Also, stocks in Europe managed to recover a bit today, and bonds are holding steady.

Steady is basically the operative word today. Volatility is barely moving, and neither is crude. Things are basically hanging around the zero line, with stocks basically trading both sides of unchanged ahead of the opening bell. What could be interesting is whether the market can turn itself around in the next couple of days. If the month ended today, it would be the first losing month since March.

Expect things to be choppy as the session continues and investors try to get their arms around things. It’s been a very fast-moving market lately. The positive takeaway from yesterday is how tech stocks marched back in the closing minutes, but people are also worried about what looks like an expanding shutdown in Europe and whether that might head west. That’s really the fear.

Powell is Back

One of the things that helped set off Monday’s selling is back in the news today. Hopes for fiscal stimulus that took a blow with the death of Supreme Court Justice Ruth Bader Ginsburg might get new attention as Powell talks to a House committee at 10:30 a.m. ET.

The title of his testimony is, “Coronavirus Aid, Relief, and Economic Security Act.” Think he might be there at least in part to help light a fiscal stimulus fire under our congressional representatives? It seems likely. We’ll see if it goes anywhere. His written testimony didn’t contain any surprises, but it’s the Q&A that’s probably going to be more interesting.

Additional Fed speakers are out there as the week goes on. What should investors consider listening for? Maybe look for any kind of specifics about just how high the Fed might let inflation go under this new scenario where 2% isn’t the equivalent of the old “double nickel” national highway speed limit. And of course, any hints at new policy ideas to support the economy in these unprecedented times.

Along with Fed speakers, we get earnings. The spotlight falls on Dow Jones Industrial Average ($DJI) component NKE this afternoon. NKE is up about 15% year-to-date despite disappointing some investors with its previous earnings report. Online sales, which have picked up for NKE during the pandemic, might be one area of focus this time out, along with any sign of improved sales in China, where consumer demand appears to be improving.

The other big corporate event today is “Battery Day” at Tesla TSLA (TSLA). See more below.

A major question as we start the session is whether Tech can pull another rabbit out of its hat if things get sloppy early on. The sector has now had three sessions in a row of late comebacks from initial weakness, and yesterday’s included some of the “mega-caps.” If those start getting traction, it could get interesting, and Apple AAPL (AAPL) rose slightly in pre-market trading.

Generally, the “stay-at-home” stocks did well yesterday as investors mulled mounting reports of more possible shutdowns, including in the U.K. Crude, as you might expect on a day when people are talking about new shutdowns, took it on the chin. It’s up just a little today but still below $40 a barrel.

Possible Support Seen Under Market

With the SPX down four sessions in a row and off nearly 10% from last month’s highs, some people might be getting nervous about odds of a March repeat.

This time around, though, it’s a little harder to see that happening. First of all, there’s just too much Fed support in place. Second, people remember how fast the market popped back off the floor after the March knock-out punch, and might not want to be sitting on the sidelines if there’s a repeat. And third, we’ve generally seen buying interest come in near the lows each day, something that didn’t happen much in March.

One level to remember on any leg down over the next day or two is 3226, which would represent a 10% pullback from the all-time highs hit in August. The SPX was briefly down 10% intraday on Monday and plowed back above that by the close. Any 10% drop represents an official “correction” for the SPX, something the COMP is already in. Remember, corrections aren’t rare or even all that drastic. Most years see at least a couple.

Another perspective point: The market is basically back to where it was in early August, when it was up more than 45% from the March lows.

Good News from China?

On an international note, Chinese bond buying by foreigners has helped drive the yuan up more than 1% this month, toward a 16-month peak, Reuters noted. Inclusion in the FTSE Russell World Government Bond Index is likely to boost inflows and support the currency. A decision from FTSE Russell is due on Thursday, Reuters said.

Why would investors be buying Chinese bonds? First, it could reflect ideas that the Chinese economy is in better virus recovery shape than the U.S. or Europe. Or it could mean investors are simply seeking yield wherever they can find it. A 10-year yield there of above 3% might look more tempting than 0.6% in the U.S. or below zero in Europe.

If the Chinese currency keeps rising, it could mean more demand for U.S. products from that huge market, not necessarily a bad thing. Remember, just a few years ago, the U.S. was concerned about China’s currency becoming too weak.

Tesla Having its Day. Who’s Next? Seems like everyone is having a special “day” lately. Today’s festivities put Tesla (TSLA) into the spotlight on its “Battery Day,” which the company has forecast to offer some big new announcements. Actually, it will “blow your mind,” according to CEO Elon Musk. Some trade media reports suggest TSLA could announce anything from longer-lasting batteries to producing batteries in-house. Enthusiasm over the event might remind some investors of excitement surrounding some of AAPL’s presentation days. Keep in mind Musk mentioned that it may not be till 2022 before some of these new developments are put into production.

After today’s “day,” be on the lookout for possibly another one in the next few weeks from Amazon AMZN (AMZN), which still hasn’t announced when “Prime Day” will happen. In a typical year, Prime Day is a good gut check ahead of the holidays to see how consumers are situated. It’s a bit of a mystery when it’s going to happen this year. And AMZN’s site doesn’t provide many hints.

The Fed’s Role: If you want another possible reason for the continued weakness, don’t dismiss the lingering impact of last week’s Fed meeting. Basically, the Fed didn’t promise to do anything new that might help reach its goal of pushing inflation above 2%. While you could argue that the market is like a “spoiled child,” always wanting another ice cream cone, it’s hard to argue that the Fed really gave bulls a lot of tasty new treats. Zero rates for years to come and continued bond purchases? That’s the same movie we’ve been watching since March. As for the Fed’s new openness to letting inflation rise above 2% at times to foster better employment? We should be lucky enough to see that happen.

The Fed is back in the news over the next few days. As noted above, Powell is due to appear before Congressional committees today and tomorrow to talk about Coronavirus aid. It’s likely he’ll again make the case for more fiscal action. Other Fed officials speaking later this week include Charles Evans, Raphael Bostic, James Bullard, and Mary Daly.

Risk-Off Breeze Blowing: The prevailing “risk-off” attitude was arguably evident yesterday in the dollar index, which slugged its way to a one-month high above 93.50. This could be a sign of investors flocking to perceived safety, as seen back when the pandemic first slammed markets. Keep an eye on the dollar over the next few days to see if it keeps attracting new interest, as that could be a sign of more “risk-off” action to come.

Still, bonds—another common “risk-off” play—didn’t do much to write home about Monday, with the 10-year yield falling only a couple basis points to 0.67%. That’s historically low, but yields have generally been holding in there near current levels. The “yield curve” isn’t really showing much change over the last few months, though 30-year yield is down slightly from recent highs. Any “flattening” of the curve would likely be read as a signal of more economic weakness.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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