foxex: Stocks Slammed

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. U.S. Markets Down on Profit Pessimism

Markets Close

Dow
26,150.58 -0.72%

S&P
2,878.20 -0.61%

Nasdaq
7,909.28 -0.56%

VIX
14.28 +8.35%

INV Anxiety Index
100.6 Neutral

US 10-Yr Yield
2.499 -0.79%

Credit: GiveMeSport

Markets Fall Ahead of Earnings

Global markets sold off on Tuesday as pessimism spread from Tokyo to Germany, and across the Atlantic to the U.S., Canada and South America. Only Russian and Indian markets posted gains. This, as corporate earnings season heats up and we start to get a clearer picture of the health of company balance sheets and their confidence for the rest of the year.

(Correction: Yesterday I said that the Dow Jones Industrial Average fell as shares of Boeing and GE declined on analysts' ratings. A smart reader immediately pointed out that GE is not a Dow component, which is correct. GE was replaced by Walgreens as a Dow component in 2018. I should've clarified that. My apologies.)

IMF Cuts Forecasts

The International Monetary Fund is losing confidence in global growth. The IMF issued a report today wherein it cut its global growth forecast from 3.5% to 3.3% for 2019, citing a slowdown in growth for 70% of the world's economies. 3.3% is not terrible, but the dramatic slowdown from 2017 to 2019 is notable. The countries pulling the global economy lower are the entire Eurozone, Latin America, the United States, the United Kingdom, Canada, and Australia. It's odd that China is not on that list, but the country is still growing at a blistering 6%, and the IMF says it has stimulated its economy through monetary and fiscal policy to stave off a serious slowdown.

The IMF sees growth rebounding towards the end of 2019 and no recession - at this point - but there are many risks. Here's a key quote from the report:

"...While the global economy continues to grow at a reasonable rate and a global recession is not in the baseline projections, there are many downside risks. Tensions in trade policy could flare up again and play out in other areas (such as the auto industry), with large disruptions to global supply chains. Growth in systemic economies such as the euro area and China may surprise on the downside, and the risks surrounding Brexit remain heightened. A deterioration in market sentiment could rapidly tighten financing conditions in an environment of large private and public sector debt in many countries, including sovereign-bank doom loop risks."

Source: IMF

The IMF is concerned about the extreme decline in manufacturing and industrial production in developed countries. While we have known that is happening, the severity of the downturn is alarming.

While manufacturing and industrial production have rebounded in China and the U.S., to a lesser degree, Germany and other countries in the Eurozone are suffering from a severe slowdown given the uncertainty surrounding Brexit and declining exports to China and the U.S., their biggest customers.

New Trade War Threats Against Europe

This development won't help matters. After agreeing to a semi-truce over increasing tariffs last July, the U.S. proposed an additional $11 billion in tariffs late Monday night, targeting European delicacies like olives, jams and Roquefort cheeses, of all things. You know things are serious when cheese gets pulled into the fight. At issue is what the Trump Administration considers unfair subsidies granted to Airbus, the French airplane maker, from European nations in 2018. In May, the World Trade Organization (WTO) ruled that Airbus indeed received illegal subsidies which, by law, gives the U.S. the right to impose new tariffs against the EU. President Trump has no love for the WTO, and has threatened to pull the U.S. out of the organization. This morning, he took to twitter and actually cited the WTO and threatened the EU with tariff increases.

What's Next

The WTO will rule this summer on the actual amount of tariffs the U.S. can impose on the EU, and the two sides may come to another agreement before that. But, between Brexit, Germany's economic malaise and the broader global slowdown, a cheese and wine tariff is the last thing Europe needs.

Saudi Aramco's Massive Debt Raise

Saudi Arabia took a giant step forward today as it floated a bond offering for Saudi Aramco, which is officially known as the Saudi Arabian Oil Co. According to the WSJ, Saudi Aramco raised $10 billion in the debt sale, which many believe to be a precursor to an actual IPO for the massive oil giant. Aramco is bigger than Google, Apple and Amazon combined, and more profitable, according to company filings. The WSJ reported that the bond offering was oversubscribed, with $100 billion in orders trying to own a piece of the Kingdom's prized possession.

Why it's Important

Saudi Arabia has been trying to diversify its economy away from fossil fuels and oil. The drop in crude oil prices over the past several years has been a serious reality check for the kingdom, which derives nearly all of its revenue and GDP from crude oil. The debt sale of its biggest company will give it much needed capital into development projects away from fossil fuels into areas like renewable energy and other technologies. Saudi Arabia had backed away from taking Aramco public last year as the stock market corrected. Today's successful debt offering is a good sign the public markets might be ready for that IPO now.

Read More: What is Saudi Aramco

Today in Financial History

On April 9, 1868, the U.S. Senate ratified the Alaska Purchase. The U.S. 'bought' the territory known as Alaska from Russia for $7.2 million or about $90 million in today's dollar. The negotiations were led by Secretary of State William H. Seward, and the territory, which spanned 586,412 square miles was known as "Seward's Icebox". Alaska became the 49th U.S. state on January 3, 1959. Here's a link to the Congressional document ratifying the purchase.

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The Fed Drained $20 Billion From the Banking System Last Week

Chart of the Day: Small Caps Hint at Market Weakness

All of the major U.S. benchmark indexes fell on Tuesday as trade war worries, this time between the U.S. and European Union, and pre-earnings season jitters weighed on markets. On a percentage basis, the small-cap Russell 2000 index fared significantly worse on Tuesday than the large-cap Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.

Even more worrying, though, the past several weeks have seen the small caps underperform large caps on a technical basis. This is especially concerning because the Russell 2000 is considered by many to be a leading indicator of the broader market. Whenever markets rise or fall substantially, chances are good that the small-cap index initially led the way. We saw this clearly late last year when the Russell 2000 first began its steep declines back in early September, while the Dow, S&P 500, and Nasdaq waited a full month after that before plunging.

More recently, technical signals have emerged suggesting that the bullish trend so far this year may not be as strong as previously thought. For one, while all three of the large-cap U.S. indexes have made 'golden crosses' (bullish technical pattern where 50-day moving average crosses above 200-day moving average), the Russell 2000 has yet to form one. Secondly, while the Dow, S&P 500, and Nasdaq all made new year-to-date highs in early April, the Russell 2000 failed to break its February high. Additionally, the small-cap index is now slightly below its 200-day moving average, while all three large-cap indexes are still far above their own respective averages.

Does this relative weakness in the small caps mean that large-caps are in for a fall? Not necessarily, but there is a possibility that the Russell 2000 is giving us a warning about market structure that should probably not be ignored.