foxex: Trade and Citigroup Data Splits Today's Market

Chart Advisor | INVESTOPEDIA

Focus on the Price

By John Jagerson, CFA, CMT

Monday, January 14, 2019

1. Chinese trade data confuses traders

2. The positives in Citigroup's (C) earnings report

3. Yield curve remains stubbornly flat and cautious

How can we improve the new Chart Advisor? Tell us at chartadvisor@investopedia.com

Major Moves

Trade data was released in China last night which contributed to a negative open in the stock market today. Some traders might be perplexed by the trade data contributing to a negative open, given that the trade balance showed a positive $57.06 billion surplus in December. This was larger than the forecasted $51.53 billion or November's actual $44.71 billion surplus. Aren't trade surpluses (at least in China's case) a good thing?

But if we break down the trade numbers into their two components, then the market's reaction makes more sense: exports and imports. The "top line" data of a trade surplus is the net value of total exports minus total imports. If both imports and exports fell–but imports fell more–then the net number will rise even though the data is worse. This month for example, total imports were down 10% and total exports were down 1.4%.

If we are worried about the impact that slowing the Chinese economy is going to have on the rest of the world (and in particular US equities) then we should be most concerned about Chinese imports. If that number continues to slow, and the Chinese government is not able to stimulate their way to more economic activity than the ripple effect across Western economies will be large.

Slowing growth in China is a problem. But are investors getting ahead of themselves when we look closer at the trend in the data? You can see the trend of Chinese imports in the following chart which places today's numbers in their historical context. Imports have come off their highs in over the last three months, but the trend is still early; and the data shows imports are still above their long-term historical average.

Bank Reports

The principle of looking beyond the headline number in Chinese import data applies even more to the earnings data that we will be getting this month. A classic example is this morning's headline data from Citigroup (C) showing a decline in revenue of 2% over the same quarter last year.

On the surface that sounds bad, but most of those losses were due to a 14% drop in fixed income trading. That shouldn't come as a surprise to anyone who's seen the markets over the last three months. Citigroup has little control over their trading revenue or trading costs, so short-term gains or losses in that division are not something that the company should take the blame or credit for when something unusual happens.

The stock was leading the S&P 500 through most of today's session as traders digested the data and started to price in that lending rose 3% from a year ago. What's notable to me is for the entire fourth quarter, long-term interest rates were higher than they were in the fourth quarter last year.

As you can see in the following chart, the Citigroup rally has brought the stock almost back to the bottom of its December 6th gap. From a technical perspective, the $60-$62 range could turn into resistance where the stock will consolidate. The top of the December 6th gap is also approximately 50% of the way between the September high and the December low. In my view, the underlying financial performance in today's earnings report puts the odds further in favor of a pause at $60-$62 per share, rather than a rejection at that level. I would suggest this bodes well for the other bank reports due this week.

Read more:

Understanding the Balance of Trade

Why the Bears are Wrong about the Banks
Goldman Still Points to Rising Risks

Source: finviz.com

Risk Indicators

Following the Citigroup (C) report, I was surprised there was no improvement in the yield curve. For example, the 10-year yield minus the 2-year yield dipped lower again today, as you can see in the following chart.

The difference between these two yields is less than 20 basis points (basis point = 1/100 of a percentage point) which does not technically qualify as a yield curve inversion, but it is very close. One of the reasons we care about this is that the narrower the yield curve is the more difficult it is for the big banks to make money on the difference between what they pay depositors and for their own loans versus what they can earn on loans they make.

As I mentioned last week, higher interest rates and a steeper yield curve has historically been very positively correlated with a growing economy and rising stock market. If the yield curve remains flat because investors are concerned about growth, it risks turning into a "self-fulfilling prophecy" and investment declines.

Read more:

Understanding the Yield Spread

What is a Basis Point?

The Predictive Power of the Yield Curve

Bottom line: Data still mixed

The slowdown in imports to China is disappointing, but not outside normal variations with or without a "trade war". If the decline continues, then investors will really have something to worry about. On the positive side, although Citigroup's (C) revenue was not as good as we might've hoped, rising loan growth on a year-over-year basis is a real positive and bodes well for the earnings releases later this week.

Investing for Beginners