The U.S. stock market jumped higher today on news over the weekend that President Trump and China's President Xi Jinping have agreed to resume talks in the hope of coming to a broader trade agreement. President Trump has also agreed to allow U.S. technology companies to resume selling equipment to China's Huawei. The United States had put the telecom company on the Commerce Department's blacklist in April.
Not surprisingly, large companies in the technology sector that generate a majority of their revenues in Asia were some of today's big winners. Semiconductor stocks that supply Huawei did especially well. Broadcom Inc. (AVGO) and Micron Technology, Inc. (MU) rose 4.34% and 3.94%, respectively. Not to be outdone, market behemoths Apple Inc. (AAPL), Alphabet Inc. (GOOGL), Amazon.com, Inc. (AMZN), and Microsoft Corporation (MSFT) gained 1.83%, 1.59%, 1.51% and 1.28%, respectively.
Of course, none of these companies saw their stock close near the high for the day as traders started taking profits off the table early in the day, but the single-day gains are still impressive. Seeing stocks rise like this on the mere promise of a resumption of trade talks is a great reminder of the drag this trade dispute with China has had on the stock market.
The S&P 500 jumped to a new all-time intra-day high today, but the index couldn't hold onto its gains through the closing bell.
The S&P 500 reached an intra-day high of 2,977.93 before pulling back to close at 2,964.33. This was 0.77% higher than the index closed last Friday, but the lack of follow-through has some traders wondering if there is truly enough bullish momentum available to enable the S&P 500 to break free from the resistance range it has been dealing with since September 2018.
Skyworks Solutions, Inc. (SWKS) and Qorvo, Inc. (QRVO) were the two top performing stocks in the index – rising 6.00% and 5.96%, respectively. However, high dividend-paying stocks – like PPL Corporation (PPL) and Entergy Corporation (ETR) in the electric utilities industry group, which fell 1.39% and 0.90% today, or Macerich Company (MAC) and Kimco Realty Corporation (KIM) in the retail REIT industry group, which fell 3.13% and 2.87% – that are typically considered safe-haven investments did their part to pull the index lower.
Newmont Goldcorp Corporation (NEM) also dropped 1.46% as gold prices pulled back to $1,389.30 per ounce as traders decreased demand for the precious metal.
Risk Indicators – Caixin Manufacturing PMI
While news of the trade-talk detente between the United States and China pushed stocks higher before the opening bell, economic news out of China ended up robbing traders of their bullish momentum.
IHS Markit, a global information and analytics aggregator, disappointed Wall Street today when it released the Caixin China General Manufacturing Purchasing Managers' Index (PMI). I know that's a huge mouthful, but it is worth the effort to digest everything this report has to say.
The Caixin Manufacturing PMI is an indicator that combines survey results from purchasing managers in the following five areas: new orders, output, employment, suppliers’ delivery times, and stock of items purchased. Caixin Media (think of it as China's Bloomberg) surveys purchasing managers regarding this information because they are on the front lines of the manufacturing sector and can give us a glimpse into what might be happening in the Chinese economy in the future.
Unfortunately, the results of the surveys were worse than expected. Analysts were anticipating the index to come in at 50.1 for June. Instead, it came in at 49.4. This is concerning because the Caixin Manufacturing PMI is a diffusion index, which means the indicator is based on a scale of 0 to 100, with 50 being the balanced midpoint.
Any number above 50 on the scale indicates expansion in the manufacturing sector of the Chinese economy. The farther above 50 the index goes, the stronger the expansion. Conversely, any number below 50 indicates contraction in the manufacturing sector of the Chinese economy. The farther below 50 the index goes, the stronger the contraction.
The reported number of 49.4 was not only lower than analysts had expected – causing a negative surprise – but also indicates that the Chinese manufacturing sector is contracting once again. This is bad news for those traders who are looking for a strong global economy to continue pushing stock prices higher.
Bottom Line – China, China, China
Keep your eyes on China for the rest of the year. As we saw today, it is a crucial component of the global economy, and it seems to be losing strength. We'll have to wait until next month to see if the slowdown in the manufacturing sector is a trend or just a one-time blip, but it could turn into a real drag if trade relations with the United States don't improve.
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