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Beyond the Numbers

Concerns About Trade War May Continue To Hit Markets
3/5/2018 8:52 AM

The major U.S. index futures are pointing to a lower opening on Monday after turning higher over the course of the previous session.

Lingering concerns about a global trade war may weigh on the markets, as President Donald Trump plans to implement tariffs on steel and aluminum imports.

In a post on Twitter, Trump indicated that the tariffs on steel and aluminum would only be removed if the U.S. negotiates a “new & fair” NAFTA agreement.

“We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed,” Trump tweeted.

He added, “Also, Canada must treat our farmers much better. Highly restrictive. Mexico must do much more on stopping drugs from pouring into the U.S. They have not done what needs to be done. Millions of people addicted and dying.”

Trading activity may be somewhat subdued, however, as traders look ahead to the Labor Department’s monthly employment report due to be released on Friday.

After coming under pressure early in the session, stocks showed a significant turnaround over the course of the trading day on Friday. The major averages bounced well off their lows of the session, with the Nasdaq and the S&P 500 climbing into positive territory.

The major averages ended the session mixed, as the Dow climbed well off its worst levels but was unable to turn positive. While the Dow fell 70.92 points or 0.3 percent to 24,538.06, the Nasdaq jumped 77.31 points or 1.1 percent to 7,257.87 and the S&P 500 climbed 13.58 points or 0.5 percent to 2,691.25.

Despite the recovery on the day, the major averages all moved lower for the week. The Dow plunged by 3 percent, the S&P 500 tumbled by 2 percent and the Nasdaq slumped by 1.1 percent.

Bargain hunting may have contributed to the rebound on Wall Street, as the early weakness came on the heels of the sharp pullback seen over the three previous sessions.

The initial drop came as traders expressed concerns about the impact President Donald Trump's plans to impose new tariffs on steel and aluminum imports will have on global trade.

Trump indicated Thursday that he plans to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports.

The tariffs are likely to benefit U.S. steel and aluminum producers, although some officials have warned of retaliation by the European Union and China.

Trump shrugged off the concerns in a post on Twitter early Friday morning, calling trade wars "good" and "easy to win"

"When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win," Trump said.

He added, "Example, when we are down $100 billion with a certain country and they get cute, don't trade anymore-we win big. It's easy!"

Following Trump's announcement, several industry groups warned that the tariffs would lead to increased costs and hamper their ability to create jobs.

A steep drop by shares of McDonald's (MCD) weighed on the Dow, with the fast food giant slumping by 4.8 percent.

The drop by McDonald's came after RBC Capital Markets cut its price target on the company's stock to $170 from $190 after a slow start for the chain's new value menu.

Biotechnology stocks showed a substantial move to the upside on the day, driving the NYSE Arca Biotechnology Index up by 3.2 percent. The index rebounded after closing lower for three straight sessions.

Biogen (BIIB) and AbbVie (ABBV) turned higher despite voluntarily withdrawing their relapsing multiple sclerosis drug Zinbryta from the global markets.

Significant strength also emerged among natural gas stocks, as reflected by the 2.3 percent gain posted by the NYSE Arca Natural Gas Index. The strength in the sector came despite a modest decrease by the price of natural gas stocks.

Tobacco, semiconductor, and healthcare stocks also moved notably higher, while steel stocks pulled back following the strength seen in the previous session.

Commodity, Currency Markets

Crude oil futures are inching up $0.10 to $61.35 a barrel after rising $0.26 to $61.25 a barrel last Friday. Meanwhile, an ounce of gold is trading at $1,324.30, up $0.90 from the previous session’s close of $1,323.40. On Friday, gold surged up $18.20.

On the currency front, the U.S. dollar is trading at 105.61 yen compared to the 105.75 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is valued at $1.2309 compared to last Friday’s $1.2317.

Asia

Asian stocks ended mostly lower on Monday as fears of a global trade war persisted and the prospect of a hung Parliament in Italy looked increasingly likely.

Chinese shares ended largely unchanged as Chinese leaders headed into an annual parliament meeting and a survey showed activity in China's services sector cooled slightly last month. The Caixin services PMI dropped to 54.2 from 54.7 in January.

Meanwhile, China maintained its growth target for 2018, despite the economy surpassing the goal last year, as the government aims to contain corporate debt and rein in pollution.

Premier Li Keqiang set the growth target at 'around 6.5 percent' for 2018. This was unchanged from the last year's target.

The benchmark Shanghai Composite index closed marginally higher at 3,256.53, while Hong Kong's Hang Seng index plunged 697.06 points or 2.28 percent to 29,886.39.

Hong Kong's private sector growth accelerated in February, the latest survey from Nikkei revealed today with a PMI score of 51.7, up from 51.1 in January.

Japanese shares hit a near five-month low as the safe-haven yen strengthened amid worries about a global trade war. The Nikkei average dropped 139.55 points or 0.66 percent to 21,042.09, the lowest level since mid-October. The broader Topix index closed 13.55 points or 0.79 percent lower at 1,694.79.

Steelmakers extended Friday's losses as the EU prepared retaliatory measures against proposed U.S. tariffs. Kobe Steel declined 1.5 percent, Nippon Steel and Sumitomo Metal shed 1.8 percent and JFE Holdings lost 2.5 percent.

In economic news, the latest survey from Nikkei showed that the services sector in Japan continued to expand in February, albeit at a slightly slower pace, with a PMI score of 51.7, down from 51.9 in January.

Australian shares joined a global slide, with material companies and financials leading the decliners. The benchmark S&P/ASX 200 index fell 33.90 points or 0.57 percent to 5,895, while the broader All Ordinaries index ended down 32 points or 0.53 percent at 5,996.40.

Miners BHP Billiton and Rio Tinto shed 1.8 percent and 1.5 percent, respectively amid controversy over Donald Trump's announcement of tariffs on steel and aluminum imports.

The big four banks fell between half a percent and 1.2 percent while energy majors Origin Energy, Oil Search and Santos ended down between 0.4 percent and 0.6 percent.

Retail Food Group plummeted as much as 36.5 percent after a series of pessimistic announcements. Job advertiser Seek advanced 1.9 percent after the company said it would buy News Corp.'s 13.75 percent stake in Seek Asia for A$157 million.

On the economic front, a slew of reports on Australian building approvals, job advertisements, company operating profits, inflation and services sector activity painted a mixed picture of the economy.

Europe

European stocks have moved higher on Monday as investors digest the results of Sunday's Italian elections and the Social Democratic party's vote for a coalition agreement with Angela Merkel in Germany.

Meanwhile, as trade tensions mount, investors await details on U.S. President Donald Trump's plan to impose tariffs on imported steel and aluminum imports.

While the German DAX Index has advanced by 0.9 percent, the French CAC 40 Index is up by 0.4 percent and the U.K.’s FTSE 100 Index is up by 0.3 percent.

Energy and material stocks have surged ahead of a meeting between OPEC and U.S. shale firms.

Royal Bank of Scotland has also advanced after reports that the bank is edging towards a final deal over misselling RMBS prior to the 2008 financial crisis.

Meanwhile, AXA has slumped after the French insurer agreed to acquire XL Group Ltd (XL), a global Property & Casualty commercial lines insurer for total consideration of US$15.3 billion or 12.4 billion euros in cash.

On the economic front, the Eurozone private sector expanded slightly less than initially estimated in February, final data from IHS Markit showed. The composite output index dropped to 57.1 from January's near 12-year high of 58.8. The flash reading was 57.5.

Survey data from IHS Markit revealed that British service sector activity expanded at the fastest pace in four months in February. The IHS Markit/Chartered Institute of Procurement & Supply Purchasing Managers' Index rose to 54.5 from 53.0 in January.

U.S. Economic Reports

At 10 am ET, the Institute for Supply Management is scheduled to release its report on activity in the service sector in the month of February.

The ISM’s non-manufacturing index is expected to dip to 59.0 after climbing to 59.9 in January, with a reading above 50 indicating growth in the service sector.

The Labor Department’s monthly jobs report is due to be released on Friday, potentially overshadowing reports on international trade, factory orders, and private sector employment.

On Wednesday, the Federal Reserve is scheduled to release its Beige Book, a compilation of anecdotal evidence on economic conditions in the twelve Fed districts that may shed light on the outlook for interest rates.
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