Stocks opened lower again this morning (Dow -71 pts; SPX -.26%). But remember, the recent pattern has been a lower open with late afternoon recovery. At the moment, the energy sector is down 1.2% on concerns that China will reduce purchases of US natural gas. Tech, industrials and consumer discretionary sectors are down as well on trade tensions. Defensive sectors are in the green as traders shift into low volatility plays. The VIX Index is pretty low (14.8) considering current geopolitical tension. Commodities are mostly lower, led by oil. WTI crude fell back to $61.75/barrel. Copper is flat on the day, as is gold. In fact, gold has done nothing since the trade war reignited. Remember when gold used to be a dependable safe-haven play? Bonds are trading higher as yields edge lower. The 10-year Treasury yield is back down to 2.39%. All types of bonds—investment grade, junk, asset-backed, Treasuries, long-term, short-term—have done pretty well this year because interest rates are down.

Bond traders are increasingly betting that the Federal Reserve will be forced—by slowing growth and low inflation—to reduce interest rates by the end of the year. According to CNBC, they’re currently pricing in a 7-in-10 chance of a .25% rate cut. Fed officials clearly are not signaling the intent to cut rates. However, Yesterday Fed Bank of Atlanta President Raphael Bostic implied that he sees an equal chance of either a rate hike or cut. In typical Fed-speak fashion, he said, “I’m not stilted to the cut side as opposed to the hike side.” So is he opening the door to the possibility of a cut?

The US and China seem to be moving farther apart on trade, realizing that it’s probably best to reduce economic interdependence. CNBC reports US Treasury Secretary Mnuchin met with Wal-Mart’s (WMT) CFO to discuss sourcing retail goods from countries other than China. In a recent speech, China’s Xi Jinping noted his country “must start all over again” on its trade relationship with the US. A prominent state-owned newspaper in China ran an article titled “Donald Trump’s Trade War and Huawei Ban Push China to Rethink Economic Ties with US.” Finally, a spokesman for a government-sponsored think tank in China implied the government is considering reducing its energy dependence on the US. All of this makes it less likely that we’ll see a trade agreement in the near future. Bloomberg calls this a “tariff tantrum,” and says the reason stocks have been resilient is that the market is pricing in a more accommodative Fed—in other words, the possibility of a rate cut.

Target (TGT) reported excellent first quarter results and the stock shot up 9%. Quarterly revenue and earnings beat Wall Street forecasts and the company achieved much better than expected 4.8% same-store-sales growth. In addition, online sales grew 42% during the quarter. And store traffic increased more than 4% from year-ago levels. Finally—and most importantly—management actually reaffirmed its prior 2019 full-year guidance. This comes despite the fact that trade tariffs on the goods it imports from China are poised to ratchet higher. The CEO said, “We continue to see a healthy economic backdrop for our business.” This report is an unqualified homerun and I’m sure comes as a shock to analysts.

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