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Beyond the Numbers

Concerns About Global Economy May Weigh On Wall Street
12/14/2018 8:56 AM

The major U.S. index futures are currently pointing to a lower opening on Friday, with stocks likely to move to the downside following the lackluster performance in the previous session.

Renewed concerns about the outlook for global economic growth are likely to weigh on the markets following the release of data showing disappointing industrial output and retail sales growth in China.

The latest batch of economic data showed Chinese industrial output grew at its slowest pace in nearly three years, increasing by 5.4 percent in November after growing by 5.9 percent a month earlier.

Meanwhile, retail sales in China grew 8.1 percent in November, the weakest growth since 2003. In October, retail sales were up 8.6 percent.

The slower pace of industrial output and retail sales growth was partly due to the impact of the ongoing trade dispute with the U.S.

A report from the Commerce Department showing a slightly smaller than expected increase in U.S. retail sales may add to the negative sentiment.

After ending Wednesday’s trading mostly higher, stocks showed a lack of direction throughout much of the trading session on Thursday. The major averages spent the day bouncing back and forth across the unchanged line.

Eventually, the major averages ended the session mixed. While the Dow rose 70.11 points or 0.3 percent to 24,597.38, the Nasdaq fell 27.98 points or 0.4 percent to 7,070.33 and the S&P 500 edged down 0.53 points or less than a tenth of a percent to 2,650.54.

The choppy trading on Wall Street came as traders continue to waffle between optimism and skepticism about a potential trade deal with China.

Early buying interest was generated after a report from Reuters indicating some Chinese state-owned companies purchased U.S. soybeans for the first time in more than six months was seen as evidence China is making good on its pledges to the U.S.

Reuters also said China appears to be easing its high-tech industrial push, dubbed "Made in China 2025," which has long irked Washington.

However, traders remain somewhat skeptical the U.S. and China will manage to reach a long-term trade agreement amid ongoing disputes over intellectual property and other key issues.

On the U.S. economic front, the Labor Department released a report showing a much steeper than expected drop in initial jobless claims in the week ended December 8th.

The report said initial jobless claims fell to 206,000, a decrease of 27,000 from the previous week's revised level of 233,000. Economists had expected jobless claims to slip to 225,000.

Jobless claims pulled back further off the nearly eight-month high reached two weeks ago to hit their lowest level in almost three months.

A separate report from the Labor Department showed import prices plunged by much more than expected in the month of November amid a steep drop in fuel prices.

The report said import prices plummeted by 1.6 percent in November after climbing by 0.5 percent in October. Economists had expected import prices to slump by 0.9 percent.

Additionally, the Labor Department said export prices tumbled by 0.9 percent in November following an upwardly revised 0.5 percent advance in October.

Export prices had been expected to edge down by 0.1 percent compared to the 0.4 percent increase originally reported for the previous month.

Reflecting the lackluster performance by the broader markets, most of the major sectors ended the day showing only modest moves.

Oil service stocks saw substantial weakness, however, with the Philadelphia Oil Service Index tumbling by 1.9 percent to its lowest closing level in fifteen years. The sell-off by oil service stocks came despite a sharp increase by the price of crude oil.

Significant weakness also emerged among financial stocks, dragging the KBW Bank Index and the NYSE Arca Broker/Dealer Index down by 1.6 percent and 1.4 percent, respectively.

Biotechnology, transportation, and chemical stocks also moved notably lower on the day, while some strength was visible among utilities stocks.

Commodity, Currency Markets

Crude oil futures are edging down $0.08 to $52.50 a barrel after jumping $1.43 to $52.58 on Thursday. Meanwhile, after slipping $2.60 to $1,247.40 an ounce in the previous session, gold futures are sliding $8.80 to $1,238.60 an ounce.

On the currency front, the U.S. dollar is trading at 113.61 yen compared to the 113.63 yen it fetched at the close of New York trading on Thursday. Against the euro, the dollar is valued at $1.1272 compared to yesterday’s $1.1361.

Asia

Asian markets ended notably lower on Friday, hurt by data showing disappointing industrial output and retail sales growth in China in the month of November.

Worries about slowing global economic growth and skepticism about a trade deal between U.S. and China anytime soon weighed on the Asian markets as well.

The latest batch of economic data showed Chinese industrial output grew at its slowest pace in nearly three years, increasing by 5.4 percent in November after growing by 5.9 percent a month earlier.

Meanwhile, retail sales in China grew 8.1 percent in November, the weakest growth since 2003. In October, retail sales were up 8.6 percent. The slower pace of industrial output and retail sales growth was due to the impact of the ongoing trade dispute with the U.S.

In the Chinese markets, financial, materials, industries, telecommunications, energy, information technology and healthcare stocks declined.

The market breadth was very weak, with as many as 1,133 shares closing lower. Only 81 stocks made it to positive territory.

China’s benchmark Shanghai Composite Index tumbled 40.31 points or 1.5 percent to 2,593.74, while Hong Kong’s Hang Seng Index plunged 429.65 points or 1.6 percent to 26,094.79.

Japanese stocks ended lower despite a fairly decent Tankan survey report. Japan's benchmark Nikkei 225 Index plummeted 441.36 points or 2 percent to 21,374.83.

Out of the 225-stock strong Nikkei Index, just 16 stocks ended higher. 205 stocks closed lower, while 4 stocks ended flat.

Tokyo Dome ended lower by 7.7 percent, while Yahoo Japan, Tokyo Electron, Eisai and Trend Micro declined by 5 to 6 percent.

Among the gainers, Showa Denko KK, Mitsubishi Estate and Isetan Mitsukoshi Holdings moved up 1.5 to 1.7 percent.

The Bank of Japan said in its quarterly Tankan Survey that the index of business and manufacturing sentiment in Japan was steady in the fourth quarter of 2018. The large manufacturing index was unchanged with a score of +19, beating expectations for +18. The outlook came in at +15, shy of forecasts for +17 and down from +19 in the previous three months.

The large non-manufacturing index came in at +24, topping forecasts for +21 and up from +22. The outlook was at +20, in line with forecasts and down from +22. All industry capex is seen higher by 14.3 percent, beating forecasts for 12.8 percent and up from 13.4 percent in the three months prior.

The Australian markets ended lower, led by losses by information technology, bank and telecommunications stocks. The benchmark S&P/ASX 200 Index ended down 59.60 points or 1.1 percent at 5602.00, and the broader All Ordinaries Index ended lower by 56.50 points or 1 percent at 5678.80.

Nine Entertainment, Domain Holdings, Speedcast International, AfterPay Touch Group and A2 Milk Company shares ended lower by 4 to 9 percent.

Meanwhile, Sigma Pharmaceuticals soared more than 43 percent and Australian Pharma Industries jumped 8.5 percent. Infigen Energy shares closed stronger by 11.8 percent. GWA Group (up 5 percent) and New Hope Corporation (up 3.2 percent) were among the other notable performers in the ASX 200 index.

Europe

Most of the markets across Europe are notably lower on Friday after opening on a highly negative note in reaction to disappointing economic data from China.

Stocks lost further ground as the session progressed, reacting to weak reports on industrial production in Germany and manufacturing activity in eurozone.

Skepticism about a U.S.-China deal before the expiry of the 90-day truce period, the ECB President's warning about a slowdown in the eurozone next year and uncertainty about a smooth Brexit have also contributed to the sell-off in European markets.

While the French CAC 40 Index has slumped by 1 percent, the U.K.’s FTSE 100 Index and the German DAX Index are both down by 0.6 percent.

In economic news from Germany, the Preliminary PMI Manufacturing Index for December has come in with a score of 51.5 compared to an expected reading of 52. In November, the Index came in with a score of 51.8. The PMI Services index dropped to 52.5 from 53.3 a month earlier.

Meanwhile, the wholesale price index for November rose 0.2 percent, compared to 0.3 percent in the preceding month.

German industrial production in October unexpectedly dropped for the first time in three months, suggesting manufacturing is yet to recover from a slowdown despite some improvement in demand.

Preliminary figures from the Federal Statistical Office showed industrial production dropped 0.5 percent from September, when production inched up 0.1 percent.

A preliminary reading on manufacturing activity in France for December came in with a score of 49.7, lower than the expected score of 51 and previous month's reading of 50.8.

The eurozone flash manufacturing PMI for December came in with a reading of 51.4, down from 51.8 a month earlier. The Composite PMI reading for the month is 51.3 against expectations of 52.8.

On the Brexit front, British Prime Minister Theresa May reportedly said Thursday that she was not expecting a "breakthrough" on a Brexit agreement at this week's EU summit and added that she would focus on the assurances over the "backstop" plan to avoid a manned Irish border.

Meanwhile, Croatia's prime minister is reported to have said that European Union leaders could meet in January for a new Brexit summit once Britain clarifies exactly what help it needs to pass the deal in the U.K. Parliament.

U.S. Economic Reports

With a steep drop in sales by gas stations partly offsetting notable growth at other stores, the Commerce Department released a report showing a slightly smaller than expected increase in U.S. retail sales in the month of November.

The Commerce Department said retail sales edged up by 0.2 percent in November after spiking by an upwardly revised 1.1 percent in October.

Economists had expected retail sales to rise by 0.3 percent compared to the 0.8 percent increase originally reported for the previous month.

Excluding a modest increase in sales by motor vehicles and parts dealers, retail sales still rose by 0.2 percent in November after jumping by an upwardly revised 1.0 percent in October. The uptick in ex-auto sales matched economist estimates.

At 9:15 am ET, the Federal Reserve is scheduled to release its report on industrial production in the month of November. Industrial production is expected to rise by 0.3 percent in November after inching up by 0.1 percent in October.

The Commerce Department is due to release its report on business inventories in the month of October at 10 am ET. Economists expect business inventories to climb by 0.5 percent in October after rising by 0.2 percent in September.

Stocks In Focus

Shares of Costco (COST) are likely to see initial weakness after the warehouse club operator reported fiscal first quarter earnings just below analyst estimates.

Coffee giant Starbucks (SBUX) may also move to the downside after lowering its forecast for long-term earnings growth.

Shares of Cisco Systems (CSCO) are also seeing pre-market weakness after Nomura/Instinet downgraded its rating on the networking giant’s stock to Neutral from Buy.

On the other hand, shares of Belmond (BEL) are moving sharply higher in pre-market trading after the luxury hotel operator agreed to be acquired by luxury goods maker LVMH for $3.2 billion including debt.
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