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Beyond the Numbers

Renewed Optimism About Trade May Lead To Initial Strength On Wall Street
12/11/2018 9:03 AM

The major U.S. index futures are pointing to a sharply higher opening on Tuesday, with stocks likely to see further upside following the substantial recovery seen over the course of the previous session.

Renewed optimism about U.S.-China trade talks may generate early buying interest after a telephone call between top officials from the world’s two largest economies.

China’s Commerce Ministry said Chinese Vice Premier Liu He spoke with U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer.

“Both sides exchanged views on putting into effect the consensus reached by the two countries’ leaders at their meeting, and pushing forward the timetable and roadmap for the next stage of economic and trade consultations work,” the ministry said in a statement.

Indications the talks are moving forward has offset some of the skepticism about the potential for a trade deal after U.S. President Donald Trump and Chinese President Xi Jinping agreed to a 90-day trade truce earlier this month.

A report from Bloomberg News that China is moving toward cutting tariffs on imported U.S.-made cars is likely to add to the positive sentiment.

Citing people familiar with the matter, Bloomberg said a proposal to reduce tariffs on cars made in the U.S. to 15 percent from the current 40 percent has been submitted to China’s Cabinet.

Just after his meeting with Xi, Trump claimed in a post on Twitter that China had agreed to reduce and remove tariffs on cars coming into China from the U.S.

After moving sharply lower in morning trading, stocks staged a substantial turnaround over the course of the trading session on Monday. The major averages climbed well off their worst levels of the day and into positive territory.

The major averages all closed higher, although the Nasdaq outperformed its counterparts, climbing 51.27 points or 0.7 percent to 7,020.52. The Dow inched up 34.31 points or 0.1 percent to 24,423.26 and the S&P 500 edged up 4.64 points or 0.2 percent to 2,637.72.

The turnaround on Wall Street came as traders went bargain hunting after the early weakness extended the sell-off seen last week.

The Dow and the S&P 500 rebounded after hitting their lowest intraday levels in seven and eight months, respectively.

Light trading activity may have contributed to the volatility, as some traders remained on the sidelines amid a lack of major U.S. economic data.

The economic calendar remains relatively light throughout the week, although reports on producer and consumer price inflation, retail sales, and industrial production are likely to attract attention in the coming days.

Traders may nonetheless remain reluctant to make significant moves ahead of the Federal Reserve's monetary policy meeting next week.

With the Fed widely expected to raise interest rates by another quarter point, traders will closely scrutinize the accompanying statement for clues about future rate hikes.

The early weakness on Wall Street reflected lingering concerns about the global economic outlook along with skepticism about the potential for a long-term trade deal between the U.S. and China.

Negative sentiment was generated by the release of a report from the Chinese customs office showing slower export growth.

Chinese exports rose 5.4 percent in November from a year earlier, marking the weakest performance since a contraction in March. Import growth stood at 3 percent, the slowest since October of 2016.

Data showing that the Japanese economy contracted the most in over four years in the third quarter also added to investor worries over slowing global growth.

Technology stocks helped lead the rebound on Wall Street, as reflected by the significant advance by the tech-heavy Nasdaq.

Within the tech sector, software stocks turned in some of the best performances, with the Dow Jones Software Index jumping by 2 percent.

Considerable strength also emerged among semiconductor and networking stocks, driving the Philadelphia Semiconductor Index and the NYSE Arca Networking Index up by 1.4 percent and 1.2 percent, respectively.

On the other hand, substantial weakness remained visible among energy stocks, which moved lower along with the price of crude oil.

Banking, steel, and housing stocks climbed off their worst levels but also ended the day notably lower, limiting the upside for the broad markets.

Commodity, Currency Markets

Crude oil futures are climbing $0.79 to $51.79 barrel after tumbling $1.61 to $51 a barrel on Monday. Meanwhile, after slipping $3.20 to $1,249.40 ounce in the previous session, gold futures are rising $3 to $1,252.40 an ounce.

On the currency front, the U.S. dollar is trading at 113.20 yen compared to the 113.33 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.1373 compared to yesterday’s $1.1356.

Asia

Asian stocks ended a choppy session on a mixed note on Tuesday after U.S. shares recovered from sharp losses to close higher overnight.

A cautious undertone prevailed as U.S.-China trade tensions simmered, oil held its biggest loss in two weeks and U.K. Prime Minister Theresa May postponed a Parliamentary vote on a Brexit deal.

Chinese shares closed higher ahead of industrial output and retail sales figures for November due on Friday. The benchmark Shanghai Composite Index rose 9.51 points or 0.4 percent to 2,594.09, while Hong Kong's Hang Seng Index inched up 19.29 points or 0.1 percent to 25,771.67.

Meanwhile, Japanese shares fell modestly to close near their lowest level since March, dragged down by financials and cyclical stocks.

The Nikkei 225 Index dropped 71.48 points or 0.3 percent to 21,148.02, the lowest level since late March. The broader Topix Index closed 0.9 percent lower at 1,575.31, the lowest closing level since May of 2017.

Growing uncertainty in the face of trade friction pulled down automakers, with Toyota Motor, Mazda Motor and Nissan Motor falling 1-3 percent.

Banks Mizuho Financial, Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group shed 1-2 percent as the threats of a no-deal Brexit become very real. Insurer Dai-ichi Life Holdings declined 1.5 percent and T&D Holdings gave up 2.8 percent.

On the other hand, SoftBank jumped 2.5 percent after it set the final price for the 2.65 trillion yen initial public offering of its Japanese telecom business at its original target.

Australian stocks rebounded from near two-year lows to end modestly higher. The benchmark S&P/ASX 200 Index rose 23.40 points or 0.4 percent at 5,575.90, while the broader All Ordinaries Index climbed 23.70 points or 0.4 percent to 5,651.20.

Healthcare shares led the surge, with Cochlear jumping 2.9 percent and CSL surging up 2.1 percent. Mining heavyweights BHP and Rio Tinto rose over 1 percent, while gold miners ended on a mixed note.

Energy stocks fell after U.S. crude oil futures fell over 3 percent on Monday on concerns about a likely drop in demand. Santos, Oil Search and Beach Energy lost 1-2 percent.

QBE Insurance Group slumped 4.1 percent after it announced a three-year operational efficiency program targeting net savings of A$130 million in 2021 and restructuring costs of A$95 million over 2019-20.

On the economic front, official data showed that house prices in Australia dropped 1.5 percent sequentially in the third quarter. That exceeded expectations for a decline of 1.6 percent following the 0.7 percent drop in the three months prior.

Europe

European stocks have moved mostly higher on Tuesday, even as the underlying tone remains cautious amid Brexit uncertainty and concerns over violent protests in France.

Investors cheered progress in trade talks after reports suggested that Chinese Vice Premier Liu He, U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer have discussed trade issues despite a dispute over the arrest of a senior Chinese businesswoman.

Meanwhile, after calling off a crunch House of Commons vote, U.K. Prime Minister Theresa May will meet European leaders and EU officials in the hope of clinching a better Brexit deal.

While the U.K.’s FTSE 100 Index has surged up by 1.9 percent, the French CAC 40 Index and the German DAX Index are both jumping by 2.1 percent.

British advertising giant WPP Group has jumped after it set out a new three-year plan to return the business to growth.

Ashtead Group has also rallied after the industrial equipment rental company said it expects annual results to be ahead of prior expectations.

Carpetright has also moved sharply higher. After reporting a wider first-half loss, the carpet and floor coverings retailer said that it was making progress on its turnaround plan.

Daimler is also posting s notable gain. The German luxury carmaker said it would buy battery cells worth more than 20 billion euros by 2030 as part of efforts to push forward with a transformation into the electric future of the company.

Copper producer Aurubis has also moved notably higher after unveiling its financial results for fiscal year 2017/18.

On the other hand, outsourcing firm Interserve has shown a notable move to the downside after saying it is in rescue talks.

U.S. Economic Reports

Producer prices in the U.S. unexpectedly showed a modest uptick in the month of November, according to a report released by the Labor Department.

The Labor Department said its producer price index for final demand inched up by 0.1 percent in November after climbing by 0.6 percent in October. Economists had expected prices to be unchanged.

Excluding food and energy prices, core producer prices rose by 0.3 percent in November following a 0.5 percent increase in October. Core prices had been expected to edge up by 0.1 percent.

At 1 pm ET, the Treasury Department is scheduled to announce the results of its auction of $38 billion worth of three-year notes.

Stocks In Focus

Shares of DSW Inc. (DSW) are moving sharply higher in pre-market trading after the footwear and accessories retailer reported fiscal third quarter results that exceeded analyst estimates on both the top and bottom lines.

Women’s apparel retailer Ascena Retail Group (ASNA) may also move to the upside after reporting better than expected fiscal first quarter earnings and sales.

Shares of AT&T (T) is also seeing some pre-market strength after Citi upgraded its rating on the telecom giant to Buy from Neutral.

On the other hand, shares of Stitch Fix (SFIX) are likely to come under pressure after the personal styling service reported fiscal first quarter results that beat estimates but said it expects active subscribers to be roughly flat in the second quarter.

Convenience store chain Casey’s General Stores (CASY) may also see initial weakness after reporting fiscal second quarter earnings that came in above expectations but an unexpected drop in same-store gallons of fuel.

Shares of Pfizer (PFE) could also open lower after J.P. Morgan downgraded its rating on the drug giant’s stock to Neutral from Overweight.
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