Market Analysis

Beyond the Numbers

Stocks May Give Back Ground Amid Skepticism About Trade Deal
12/4/2018 8:47 AM

The major U.S. index futures are pointing to a lower opening on Tuesday, with stocks likely to give back ground following the rally seen in the previous session.

Profit taking may contribute to initial weakness on Wall Street, as traders cash in on the strong gains posted on Monday in reaction to the trade war truce reached by President Donald Trump and Chinese President Xi Jinping.

Uncertainty about whether the 90-day truce will give the U.S. and China enough time to reach a long-term trade agreement may inspire traders to cash in on yesterday’s strong upward move.

News that U.S. Trade Representative Robert Lighthizer, one of Trump’s more hawkish advisors on trade with China, has been tapped to lead the negotiations has added to the skepticism.

Trump has appeared optimistic about the potential for an agreement, claiming U.S. relations with China have taken a “big lead forward” as a result of his meeting with XI.

“Very good things will happen,” Trump said in a post on Twitter. “We are dealing from great strength, but China likewise has much to gain if and when a deal is completed. Level the field!”

“President Xi and I have a very strong and personal relationship,” he added. “He and I are the only two people that can bring about massive and very positive change, on trade and far beyond, between our two great Nations.”

Overall trading activity may be somewhat subdued, however, with a lack of major U.S. economic data likely to keep some traders on the sidelines.

Tomorrow’s national day of mourning for former President George H.W. Bush may also limit trading activity, as the NYSE and the Nasdaq will be closed on the day and the release of most economic data has been postponed.

After moving sharply higher at the open, stocks gave back some ground but managed to remain firmly positive throughout the trading session on Monday. With the advance on the day, the major averages added to the substantial gains posted last week.

The major averages moved roughly sideways for much of the session before closing significantly higher. The Dow surged up 287.97 points or 1.1 percent to 25,826.43, the Nasdaq soared 110.98 points or 1.5 percent to 7,441.51 and the S&P 500 shot up 30.20 points or 1.1 percent to 2,790.37.

The initial jump on Wall Street reflected a positive reaction to the highly anticipated meeting between Trump and Xi over the weekend.

At the meeting, Trump and Xi agreed to a 90-day truce in the escalating trade war between the world's two largest economies as they work to reach a long-term trade deal.

A White House statement said Trump agreed not to raise the tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent on January 1st as planned.

In return, China agreed to purchase a "not yet agreed upon, but very substantial, amount" of agricultural, energy, industrial, and other product from the U.S.

The White House said the U.S. and China will use the next 90 days to attempt to reach an agreement on issues such as forced technology transfer, intellectual property protection, and non-tariff barriers.

If the two countries are not able to reach an agreement by the end of the time period, the 10 percent tariffs on Chinese goods will be raised to 25 percent.

In remarks to reporters aboard Air Force One, Trump called the agreement with Xi an "incredible deal," claiming it will have an "incredibly positive impact" on "every type of product."

Trump also said China will be "opening up" and "getting rid of tariffs," stating in a subsequent post on Twitter that China has agreed to reduce and remove tariffs on cars coming into the country from the U.S.

Paul Ashworth, Chief U.S. Economist at Capital Economics, noted Trump ripped up an earlier trade deal with China negotiated by Commerce Secretary Wilbur Ross.

"We suspect that since he negotiated this deal himself, Trump will be much more reluctant to torpedo it when his own personal reputation is on the line," Ashworth said.

He added, "Nevertheless, his own administration includes plenty of China hawks who are pushing the protectionist agenda, so we suspect China will have to offer a little more than the minor concessions that South Korea, Mexico and Canada agreed to reach trade deals with the U.S."

On the U.S. economic front, the Institute for Supply Management released a report showing an unexpected acceleration in the pace of growth in manufacturing activity in the month of November.

The ISM said its purchasing managers index climbed to 59.3 in November after falling to 57.7 in October, with a reading above 50 indicating growth in manufacturing activity. Economists had expected the index to edge down to 57.5.

Meanwhile, a separate report from the Commerce Department showed construction spending unexpectedly edged lower in October.

Energy stocks showed a substantial move to the upside on the day, benefiting from a sharp increase by the price of crude oil.

Reflecting the strength in the energy sector, the Philadelphia Oil Service Index spiked by 3.5 percent, while the NYSE Arca Natural Gas Index and the NYSE Arca Oil Index both surged up by 2.7 percent.

Considerable strength also emerged among computer hardware stocks, as reflected by the 3.4 percent rally by the NYSE Arca Computer Hardware Index.

Steel, semiconductor, gold, and retail stocks also saw significant strength on the day, reflecting broad based buying interest on Wall Street.

Commodity, Currency Markets

Crude oil futures are climbing $0.89 to $53.84 barrel after jumping $2.02 to $52.95 a barrel on Monday. Meanwhile, after surging up $13.60 to $1,239.60 ounce in the previous session, gold futures are rising $5.30 to $1,244.90 an ounce.

On the currency front, the U.S. dollar is trading at 112.87 yen compared to the 113.66 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.1392 compared to yesterday’s $1.1354.


Asian stocks closed mostly lower on Tuesday as the initial euphoria over the U.S.-China truce on import tariffs subsided and investors wondered if a 90-day tariff truce was enough for the two countries to resolve their differences on a range of issues.

According to media reports, U.S. President Donald Trump has appointed Robert Lighthizer, one of his cabinet's most strident trade hawks, to oversee the next round of trade negotiations with China.

Chinese stocks bucked the downtrend in the region, with China's Shanghai Composite Index rising 11.16 points or 0.4 percent to 2,665.96. Hong Kong's Hang Seng Index closed up 0.3 percent at 27,260.44.

China's central bank chief said in an article in the China Finance magazine that the central bank would keep its monetary policy flexible and adjust it appropriately according to changes in the country's economic situation.

Japanese shares fell on profit taking after a strong rally in the previous session. The Nikkei 225 Index slid from a two-week high to end the session down 538.71 points or 2.4 percent at 22,036.05. The broader Topix Index also closed 2.4 percent lower at 1,649.20.

Falling U.S. yields on expectations of a slower pace of rate hikes by the Federal Reserve pulled down financials, with Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Dai-ichi Life Holdings losing 2-3 percent.

Companies sensitive to China also fell, with Yaskawa Electric and Hitachi Construction Machinery tumbling 3-4 percent. Sharp Corp. plunged 5.7 percent on a Nikkei report that it has laid off more than 3,000 foreign workers in Japan.

Australian stocks also succumbed to profit taking after the previous session's sharp jump. The benchmark S&P/ASX 200 Index fell 1 percent to 5,713.10 after climbing 1.8 percent on Monday. The broader All Ordinaries Index also closed 1 percent lower at 5,797.50.

Financials led the decliners, with the big four banks ending down between 0.9 percent and 1.4 percent. Grocery wholesaler Metcash slumped 7.2 percent to extend losses from the previous session after the company warned of tough times ahead in the supermarket sector. Wesfarmers lost 2.4 percent.

ResMed dropped 1 percent on news the sleep device manufacturer would acquire U.S.-based asthma and pulmonary specialist Propeller Health for $225 million.

In economic news, Australia posted a seasonally adjusted current account deficit of A$10.688 billion in the third quarter, official data showed. That missed expectations for a shortfall of A$10.2 billion following the upwardly revised A$12.056 billion deficit in the three months prior.

The Reserve Bank of Australia left its benchmark interest rate on hold at a record low of 1.5 percent, citing sluggish wage growth and low inflation. The central bank said that the low level of interest rates is continuing to support the Australian economy.


European stocks have fallen on Tuesday, as confused signals over U.S.-China trade talks as well as a broadly weaker dollar have prompted traders to take some profits after the previous session's rally.

Italy has continued to be in focus after the country's Prime Minister Giuseppe Conte said the revised budget would be ready in the coming hours.

The British pound has jumped after a senior EU law officer said the U.K. could halt Brexit by unilaterally revoking Article 50.

While the French CAC 40 Index has fallen by 0.4 percent, the U.K.’s FTSE 100 Index and the German DAX Index are both down by 0.5 percent.

Falling U.S. yields on expectations of slower pace of rate hikes by the Federal Reserve have pulled down financials, with banks Commerzbank, Deutsche Bank, BNP Paribas, Credit Agricole and Societe Generale all moving notably lower.

JCDecaux has also slumped in Paris after a brokerage downgrade. Ferguson, a specialist distributor of plumbing and heating products, has also tumbled despite the company posting solid first quarter results.

IG Group Holdings has also moved to the downside after the online trading company said it expects revenue in the first half to be around 6 percent lower than last year.

Meanwhile, Danske Bank A/S has advanced after the Danish bank said it has built a capital buffer of as much as $2.7 billion (2.4 billion euros) to absorb potential fines in a money laundering case.

Low-cost airline Ryanair Holdings has also risen in London after reporting positive traffic figures for November.

U.S. Economic Reports

No major U.S. economic reports are scheduled to be released today, while most data due to be released on Wednesday has been postponed due to the national day of mourning for former President George H.W. Bush.

At 10 am ET, New York Federal Reserve President John Williams is due to deliver opening remarks and take questions from journalists at an economic press briefing on labor market and wage trends in New York.

Stocks In Focus

Shares of Dollar General (DG) are moving significantly lower in pre-market trading after the discount retailer reported fiscal third quarter earnings that met analyst estimates on slightly better than expected sales but lowered its full-year guidance.

Tech giant Apple (AAPL) may also move to the downside after HSBC downgraded its rating on the company’s stock to Hold from Buy.

Shares of Cirrus Logic (CRUS) may also come under pressure after the chip maker lowered its fiscal third quarter revenue guidance due to recent weaknesses in the smartphone market.

On the other hand, shares of RH (RH) are moving sharply higher in pre-market trading after the home furnishings company reported better than expected fiscal third quarter results and raised its fourth quarter and full-year guidance.

Auto parts retailer AutoZone (AZO) may also see initial strength after reporting fiscal first quarter results that exceeded analyst estimates on both the top and bottom lines.

Shares of Waste Management (WM) could also move to the upside after Goldman Sachs upgraded its rating on the waste processing company’s stock to Buy from Sell.
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