Market Analysis

Beyond the Numbers

Rebound By Chinese Stocks May Extend To Wall Street
10/19/2018 8:54 AM

The major U.S. index futures are pointing to a higher opening on Friday, with stocks likely to regain ground following the sell-off seen in the previous session.

Early buying interest may generated by a rally by Chinese stocks, which rebounded strongly from an initial move to the downside despite disappointing GDP data.

Data showed Chinese GDP climbed an annual 6.5 percent in the third quarter, shy of estimates for 6.6 percent and down from 6.7 percent in the previous quarter.

However, investors reacted positively after three top Chinese financial regulators stepped in to bolster investor confidence.

The heads of the People's Bank of China, the Securities Regulatory Commission and the Banking and Insurance Regulatory Commission all issued statements expressing support for the markets.

A positive reaction to upbeat earnings news from big-name companies such as Procter & Gamble (PG) and Honeywell (HON) may also contribute to initial strength on Wall Street.

Traders may be reluctant to make significant moves, however, as concerns about rising interest rates and tension between the U.S. and Saudi Arabia may continue to weigh on the markets.

After ending Wednesday’s trading roughly flat, stocks moved sharply lower over the course of the trading day on Thursday. The major averages attempted a recovery after seeing early weakness but saw a significant pullback as the day progressed.

The major averages ended the day firmly in negative territory. The Dow tumbled 327.23 points or 1.3 percent to 25,379.54, the Nasdaq plunged 157.56 points or 2.1 percent to 7,485.14 and the S&P 500 slumped 40.43 points or 1.4 percent to 2,768.78.

The sell-off on Wall Street on Wall Street came after Treasury Secretary Steven Mnuchin announced he will not attend an upcoming investment conference in Saudi Arabia.

"Just met with @realDonaldTrump and @SecPompeo and we have decided, I will not be participating in the Future Investment Initiative summit in Saudi Arabia," Mnuchin said in a post on Twitter.

Mnuchin joins several other top executives and international finance leaders that have dropped out of the conference, including JPMorgan Chase (JPM) CEO Jamie Dimon and International Monetary Fund Managing Director Christine Lagarde.

The announcement by Mnuchin comes as Saudi Arabia continues to face considerable international pressure over the recent disappearance and apparent murder of journalist Jamal Khashoggi.

Lingering concerns about the outlook for interest rates also weighed on the markets as traders continued to digest the minutes of the Federal Reserve's latest monetary policy meeting.

The minutes released Wednesday afternoon showed the Fed continues to favor a "gradual approach" to raising interest rates, with the meeting participants generally judging that the economy was evolving about as anticipated.

The Fed's forecasts point to one more rate hike before the end of this year, with CME Group's FedWatch indicating a nearly 80 percent chance of a quarter-point rate increase in December.

On the U.S. economic front, the Labor Department released a report showing a modest decrease in first-time claims for U.S. unemployment benefits in the week ended October 13th.

The report said initial jobless claims slipped to 210,000, a decrease of 5,000 from the previous week's revised level of 215,000. Economists had expected jobless claims to edge down to 212,000.

A separate report released by the Federal Reserve Bank of Philadelphia showed manufacturing activity in the Philadelphia area grew at a slightly slower rate in the month of October.

The Philly Fed said its diffusion index for current general activity edged down to 22.2 in October from 22.9 in September, although a positive reading still indicates growth in regional manufacturing activity. The index had been expected to drop to 20.0.

Meanwhile, the Conference Board released a report showing its index of leading U.S. economic indicators increased in line with economist estimates in September.

The Conference Board said its leading economic index climbed by 0.5 percent in September after rising by 0.4 percent in August.

Oil service stocks showed a substantial move to the downside on the day, dragging the Philadelphia Oil Service Index down by 3.6 percent. With the drop, the index fell to its lowest closing level in over a month. The weakness among oil service stocks came amid a notable decrease by the price of crude oil.

Significant weakness was also visible among steel stocks, as reflected by the 2.8 percent slump by the NYSE Arca Steel Index. Steel stocks moved lower partly due to concerns about the outlook for Chinese demand.

Transportation stocks also saw considerable weakness, resulting in a 2.6 percent drop by the Dow Jones Transportation Average.

Semiconductor, software, retail, and financial stocks also showed notables moves to the downside, reflecting broad based weakness on Wall Street.

Commodity, Currency Markets

Crude oil futures are climbing $0.70 to $69.35 a barrel after slumping $1.10 to $68.65 a barrel on Thursday. Meanwhile, after rising $2.70 to $1,230.10 an ounce in the previous session, gold futures are up $2.70 at $1,232.80 an ounce.

On the currency front, the U.S. dollar is trading at 112.43 yen compared to the 112.21 yen it fetched at the close of New York trading on Thursday. Against the euro, the dollar is valued at $1.1461 compared to yesterday’s $1.1453.


Asian stocks ended mixed on Friday as weak Chinese data added to investor concerns over Italy's controversial budget, rising U.S. interest rates and U.S.-Saudi tensions.

The euro lingered near a one-week low against the dollar after the European Commission said Italy's 2019 budget draft is in serious breach of EU budget rules.

U.S. President Donald Trump said on Thursday he presumes journalist Jamal Khashoggi has been killed and that the U.S. response to Saudi Arabia will likely be “very severe.”

Regional markets recovered from a weak start to close mixed after Chinese regulators stepped in to bolster investor confidence.

Chinese shares bounced back from early weakness to close sharply higher after the central bank chief downplayed market fluctuations and the securities regulator said it would encourage funds to help resolve liquidity difficulties at listed companies.

The benchmark Shanghai Composite Index jumped 64.05 points or 2.6 percent to end at 2,550.46, while Hong Kong's Hang Seng Index rose 106.85 points or 0.4 percent to 25,561.40.

Earlier in the day, data showed Chinese GDP climbed an annual 6.5 percent in the third quarter of 2018, shy of estimates for 6.6 percent and down from 6.7 percent in the previous quarter.

Industrial production climbed 5.8 percent year-on-year in September, below forecasts for 6.0 percent and down from 6.1 percent in August.

However, retail sales climbed an annual 9.2 percent and fixed asset investment gained 5.4 percent to beat forecasts.

Japanese shares fell to extend losses from the previous session, although stocks closed well off their lows as Chinese markets rose despite the weaker than expected GDP data.

The Nikkei 225 Index fell more than 400 points before recovering some lost ground to end the session down 126.08 points or 0.6 percent at 22,532.08. The broader Topix index ended 0.7 percent lower at 1,692.85.

Construction equipment makers continued to fall, with Komatsu losing 3.1 percent and Kubota Corp declining 1.1 percent. Index-heavyweight SoftBank Corp dropped 1.2 percent and Nintendo slumped 4 percent.

Exporters, Honda Motor, Toyota, Sony and Panasonic all fell around 1 percent after the yen strengthened overnight towards the one-month peak versus the dollar reached on Monday.

In economic news, the Ministry of Internal Affairs and Communication said that consumer prices in Japan were up 1.2 percent year-on-year in September. That was shy of expectations for an increase of 1.3 percent, which would have been unchanged from the August reading.

Australian closed marginally lower, with mining stocks pacing the decliners after the release of weak GDP data from China, Australia's largest trading partner.

The benchmark S&P/ASX 200 Index edged down 2.90 points or 0.1 percent to 5,939.50, while the broader All Ordinaries Index slipped 0.1 percent to 6,042.80.

Rio Tinto tumbled 1.7 percent and Fortescue Metals Group lost 2.3 percent as base metal prices dipped on worries about slowing Chinese growth and higher U.S. interest rates. Energy stocks ended mixed as oil prices remained on track for a second weekly drop.

Meanwhile, Saracen Mineral Holdings soared 5.3 percent as gold prices edged higher on safe-haven demand. Banks ANZ, Commonwealth and Westpac rose between 0.6 percent and 1 percent.


European stocks are turning in a mixed performance during trading on Friday as Italian government bond yields hit four-year highs on concerns over the country's controversial budget plans.

The Italian government has until Monday to respond to the European Commission's letter that the nation's significantly higher deficit targets represented a deviation "unprecedented in the history" of EU budget rules.

While the U.K.’s FTSE 100 Index is up by 0.4 percent, the German DAX Index is down by 0.1 percent and the French CAC 40 Index is down by 0.7 percent.

The British pound is largely flat after European Union negotiator Michel Barnier said disagreements over the Ireland border could lead to a breakdown in Brexit discussions.

Swedish builder Skanska has moved sharply lower on the day after the company revealed more writedowns in the United States.

Telia Company has also tumbled after its mobile service revenue dipped slightly in the third quarter. Automaker Volvo is also under pressure after reporting a drop in bus deliveries.

French tire maker Michelin has slumped as it cut full-year market forecasts, citing slowing Chinese car demand and new emission standards.

Conglomerate Bouygues has also plummeted after a profit warning over ongoing problems with two biomass power plants in the U.K. and a data centre in Ireland.

Meanwhile, retail property developer Intu Properties has soared on news the company is considering a 215 pence per share takeover offer from a consortium backed by Peel Group, the Olayan Group and Brookfield Property Group.

Software AG has also risen after the business software firm confirmed its full-year outlook after reporting a 13 percent increase in third quarter net income.

In economic news, the euro area current account surplus increased in August from the previous month, preliminary data from the European Central Bank showed.

The current account surplus rose to 24 billion euros from UR 19 billion euros in July. A year ago, the surplus was 39 billion euros.

U.K. public sector net borrowing excluding public sector banks stood at 4.1 billion pounds in September, which was 0.8 billion pounds less than in September 2017, a government report showed. This was the lowest September deficit since 2007.

U.S. Economic Reports

At 10 am ET, the National Association of Realtors is scheduled to release its report on existing home sales in the month of September. Existing home sales are expected to drop by 0.7 percent in September after coming in unchanged in August.

Atlanta Federal Reserve President Raphael Bostic is due to participate in an armchair discussion on the economic outlook in Macon, Georgia, at 12 pm ET.

At 12:45 pm ET, Dallas Fed President Robert Kaplan is scheduled to participate in a moderated Q&A session at the Shadow Open Market Committee at the Princeton Club in New York.

Stocks In Focus

Shares of PayPal (PYPL) are moving sharply higher in pre-market trading after the payment services company reported third quarter results that exceeded analyst estimates on both the top and bottom lines.

Consumer products giant Procter & Gamble (PG) is also likely to see initial strength after reporting fiscal first quarter earnings that exceeded expectations on an unexpected increase in sales.

Shares of Honeywell (HON) may also move to the upside after the industrial conglomerate reported better than expected third quarter earnings.

On the other hand, shares of American International Group (AIG) may come under pressure after the insurer said it expected third quarter catastrophe losses of $1.5 to $1.7 billion due to typhoons in Japan, Hurricane Florence, and California mudslides.

eBay (EBAY) is also seeing notably pre-market weakness after Stifel Nicolaus downgraded its rating on the eCommerce giant’s stock to Hold from Buy.

Shares of Harley-Davidson (HOG) may also move to the downside after BMO Capital downgraded its rating on the motorcycle maker’s stock to Market Perform from Outperform.
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