U.S. equities finished mixed on Thursday after recovering from early session weakness. This continues a tight sideways pattern for large-cap stocks that’s been in place two weeks as prices stall near the early March high. But there was plenty of action if one knew where to look, as commodities were hit hard on chatter of financial sector trouble in China (where industrial metals are used as loan collateral), as well as some hard reversals in key tech stocks like Tesla Inc (NASDAQ:TSLA) and Facebook Inc (NASDAQ:FB) on disappointing results.
In the end, the Dow Jones Industrial Average lost a fraction, the S&P 500 gained 0.1%, the Nasdaq Composite gained 0.1% and the Russell 2000 lost 0.2%. Treasury bonds were weaker across the curve, the dollar was lower, gold lost 1.5% to continue the intense selling pressure on precious metals (silver is getting hit even harder) and crude oil lost nearly 5% to return to levels not seen since November.
Breadth was negative, with 1.8 decliners for every advancing issue on the NYSE. Consumer staples led the way with a 0.8% gain while energy and telecoms were the laggards, down 1.9% and 1.1%, respectively.
Fitbit Inc (NYSE:FIT) gained 12.2% on a smaller-than-expected Q1 loss thanks to strong revenues. Forward guidance was weak, however, which was shrugged off thanks to positive management commentary on improved inventory levels and upcoming product launches in the second half of the year. Square Inc (NYSE:SQ) surged 8.9% thanks to an operating earnings beat on revenues roughly 5% ahead of consensus estimates.
On the downside, Avon Products, Inc. (NYSE:AVON) fell 22.2% on an unexpected quarterly loss on inline revenues as the number of active representatives dropped on a year-over-year basis. Cheesecake Factory Inc (NASDAQ:CAKE) fell 6.7% after a Q1 earnings miss on lower-than-expected comp-store sales growth of 0.3% (vs. 0.6% expected) with labor costs noted as a headwind on margins.
TSLA fell 5% on a wider-than-expected loss and dimming expectations for the Model 3’s launch in July. And FB fell 0.6%, although it was down much more earlier in the session on expectations for a slowdown in ad revenue growth.
On the political front, the big story was the passage of healthcare reform legislation out of the House of Representatives by a thin margin of 217-213 after an embarrassing failure to move forward back in March. It was a victory for the White House and the GOP in general, however, although the bill must now move to the Senate.
Stepping back, the carnage in commodities is getting serious with the DB Commodity Index Tracking Fund(ETF) (NYSEARCA:DBC) testing critical two-year support levels.
Some of this is crude oil, with West Texas Intermediate falling below the $46-a-barrel level for the first time in more than a year. This despite crossing headlines that both OPEC and non-OPEC nations such as Russia are expected to agree on a further six-month extension to the supply freeze agreement signed last year.
Why is the market ignoring the news? Because it’s increasingly clear the cap isn’t working. U.S. shale producers stepped into the void, encouraged by the price recovery OPEC initially created, to increase drilling rig activity and recapture market share the oil sheiks won during the oil price war they started in 2014.
Moreover, inventories continue to swell suggesting the production cap did little to actually rebalance global supply and demand.
Some of this is precious metals, with silver in particular getting smashed back to late December levels as extended futures market positioning is unwound. And some of this is industrial metals as liquidity tightening in China is resulting in limit down selloffs: Dalian Iron Ore went limit down (down 8%) and reopened down another 5% overnight. Lead, copper, nickel, bitumen, rubber, and zinc are all getting hit hard.
And this all calls into question the “Trump-flation” trade that’s been so pervasive since Election Day. If the raw materials needed to power faster economic growth are being liquidated, something is very wrong with the ebullient global economic outlook. Or the sellers in China have it wrong.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers. Redeem by clicking the links above.
