U.S. markets showed continued strength on positive trade developments but finished mixed for the session as earnings dragged down the blue-chips.

President Trump’s trade representative briefed lawmakers to expect a negotiated North America Free Trade Agreement within three weeks with top negotiators expected to meet in Washington on Thursday and Friday. Volatility bubbled higher but remains under key resistance levels.

The Russell 2000 rose 0.4% after holding positive territory throughout the session while reaching an intraday peak of 1,592. The Nasdaq gained 0.2% after trading to a high of 7,319 while closing just below the 7,300 level.

The S&P 500 was up 0.1% after testing a high of 2,717 and holding the 2,700 level for the second-straight session. The Dow slipped 0.1% after trading in a 111-point range with the low tapping 24,721.

Energy and Industrials led sector strength after rising 1.8% and 1.1%. Consumer Staples sank 0.8% to pace sector laggards while Financials and Utilities gave back 0.4% and 0.3%, respectively.

Global Economy – European markets were higher for a second-straight session despite weaker-than-expected economic news. UK’s FTSE 100 jumped 1.3% and France’s CAC 40 was up 0.5%. The Belgium20 and the Stoxx 600 Europe gained 0.3% while Germany’s DAX 30 added 5 points, or 0.04%.

Eurozone March CPI was revised lower to 1.3% from the initial report of 1.4%.
Eurozone March new car registrations fell 5.3% to 1,793,000 units, and year-to-date are up 0.7% to 4,172,000.

UK March CPI rose 0.1% month-over-month and 2.5% year-over-year, weaker than expectations of 0.3% and 2.7%, respectively. March core CPI rose 2.3% year-over-year, weaker than expectations of 2.5%.

Asian markets closed higher across the board as geopolitical tensions on the Korean peninsula eased. President Trump said Mike Pompeo met with North Korean leader Kim Jong Un last week and that a good relationship was formed.

Japan’s Nikkei surged 1.4% and South Korea’s Kospi soared 1.1%. China’s Shanghai rallied 0.8% and Hong Kong’s Hang Seng was higher by 0.7%. Australia’s S&P/ASX 200 climbed 0.3%.

The Japan March trade balance was in surplus by 707.3 billion yen, wider than expectations of 499.2 billion yen.

Japan March exports rose 2.1% year-over-year, weaker than expectations of 5.2%. March imports unexpectedly fell 0.6%, weaker than expectations for a gain of 6.3% year-over-year.

MBA Mortgage Applications rose 4.9%, accompanied by a 6.1% surge in the purchase index and a 3.5% rise in the refinancing index for the week ending April 13th. The average 30-year fixed mortgage rate was flat at 4.66%.

In the latest Beige Book report, the central bank stated: “Economic activity continued to expand at a modest to moderate pace across the 12 Federal Reserve Districts in March and early April.

Outlooks remained positive, but contacts in various sectors including manufacturing, agriculture, and transportation expressed concern about the newly imposed and/or proposed tariffs. Consumer spending rose in most regions, with gains noted for nonauto retail sales and tourism, but mixed results for vehicle sales.

Manufacturing activity grew moderately, and demand for nonfinancial services was mostly solid. Residential construction and real estate activity expanded further, although low home inventories continued to constrain sales in several Districts.

Loan demand increased, and commercial real estate activity and construction improved since the last report.”

The report went on to say: “Widespread employment growth continued, with most Districts characterizing growth as modest to moderate. Labor markets across the country remained tight, restraining job gains in some regions.

Contacts continued to note difficulty finding qualified candidates across a broad array of industries and skill levels. Prices increased across all Districts, generally at a moderate pace.

There were widespread reports that steel prices rose, sometimes dramatically, due to the new tariff. Prices for building materials continued to rise briskly, especially for lumber, drywall, and concrete. Transportation costs also generally rose, with contacts citing higher fuel prices and shortages of truck drivers as the primary causes.”

Market Sentiment – Dallas Fed Robert Kaplan repeated he favors two more hikes this year, and that’s his base case, he added. He noted that energy has gone from a headwind to a tailwind, and that global demand for oil is rising.

He expects moderate growth around 2.5% to 2.75%, but moderating after and slowing to a 1.75% to 2% pace in 2020.

St. Louis Fed James Bullard remains worried about an inverted yield curve, especially a Fed-instigated one at that. He warned against further tightening unless there are upside surprises and said analysts shouldn’t bake in rate increases at this point.

Bullard went on to say if the committee pushes ahead here and longer rates don’t cooperate, analysts could have an inverted yield curve within six months.

He added the curve is a powerful predictor of economic downturns and in the current environment, analysts don’t really need to test those waters as inflation is pretty low. He said the markets just aren’t seeing a lot of price pressures and advocates a wait-and-see approach.

New York Fed William Dudley discussed interest rate risk and stated “In today’s low interest rate environment, analysts have observed that some community banks have taken on more interest rate risk by increasing the maturity of their assets and the average duration of their loan portfolios.

In the last rate tightening cycle, analysts observed that banks with larger concentrations of long-term earning assets experienced lower margins. It will be important for community banks that are very sensitive to interest rate risk to evaluate the risk management of their loan portfolios.”

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the first time in four sessions following the backtest to $120.28. Support at $120.50-$120 held to keep a 3-week trading range intact.

There is risk to $119.50-$119 and the 50-day moving average on a close below the latter. Resistance remains at $121-$121.50.

Market Analysis – The PowerShares QQQ (QQQ) made an intraday run to $167 with fresh resistance and mid-March support at $167-$167.50 holding.

Continued closes above the latter would be a bullish development for a possible near-term run towards $168-$170. Near-term support is at $165.50-$165 with a move below the latter likely leading to a backtest towards $164-$163.50 and the 50-day moving average.

RSI has been in a nice uptrend and is approaching resistance at 60.

Continued closes above this level would be a bullish signal for a possible run towards 70 amd eaely March highs. Support is at 45-40.

The Energy Select Sector Spider (XLE) traded higher for the 7th-time in 8 sessions after reaching a peak of $74.22. Near-term resistance at $74-74.50 held and represents prior support from late February.

Continued closes above the latter could lead to a push towards $75-$76. Rising support is at $73-$72.50 with a close below $72 signaling a short-term top.

RSI is pushing December resistance at 70 and a level that held as support through late January.

Continued closes above this level could lead to a possible run towards 80. Support is 65-60.

Existing Position Update

AAPL is holding steady  – expect more upside over the near term in anticipation of earnings.

TSLA is well above our short strike price and we may liquidate the position a bit early if decay continues at the current rate.

PANW is a new position. Expect some congestion and lower volatility from the overall market. Earnings are not due for some time and tech should stall when indices approach new highs.

Roger Scott