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Beyond the Numbers

Caution Likely To Prevail Amid Focus On U.S.-China Trade Talks
1/7/2019 9:01 AM

The major U.S. index futures are pointing to a roughly flat opening on Monday following the roller coaster ride seen over the past few sessions.

Traders may be reluctant to make significant moves as they keep a close eye on high-level trade talks between the U.S. and China in Beijing.

Deputy U.S. Trade Representative Jeffrey Gerrish is leading the U.S. team at the two-day meeting, with a spokesman for China’s Foreign Ministry predicting “positive and constructive discussions.”

News on the merger-and-acquisition front may generate some buying interest, although traders are likely to remain cautious amid the ongoing U.S. government shutdown.

Weekend meetings reportedly made little progress toward ending the impasse over funding for President Donald Trump’s controversial border wall.

Stocks showed a substantial move to the upside over the course of the trading day on Friday, more than offsetting the sharp pullback seen in the previous session. The major averages all moved significantly higher, with the tech-heavy Nasdaq leading the way.

The major averages moved roughly sideways going into the close, holding on to strong gains. The Dow surged up 746.94 points or 3.3 percent to 23,433.16, the Nasdaq soared 275.35 points or 4.3 percent to 6,738.86 and the S&P 500 spiked 84.05 points or 3.4 percent to 2,531.94.

With the rally on the day, the major averages also moved notably higher for the week. While the Dow jumped by 1.6 percent, the Nasdaq and the S&P 500 shot up by 2.3 percent and 1.9 percent, respectively.

The rebound on Wall Street partly reflected a positive reaction to a Labor Department report showing much stronger than expected job growth in the month of December.

The Labor Department said non-farm payroll employment soared by 312,000 jobs in December after climbing by an upwardly revised 176,000 jobs in November.

Economists had expected employment to increase by about 177,000 jobs compared to the addition of 155,000 jobs originally reported for the previous month.

Paul Ashworth, Chief U.S. Economist at Capital Economics, suggested the substantial job growth in December would "seem to make a mockery of market fears of an impending recession."

"Admittedly, employment is a coincident indicator, whereas the ISM manufacturing index, which we learned yesterday fell sharply in December, is a leading indicator," Ashworth said.

He added, "But, even allowing for that distinction, this employment report suggests the U.S. economy still has considerable forward momentum."

The report also said the unemployment rate rose to 3.9 percent in December from 3.7 percent in November, while economists had expected the unemployment rate to come in unchanged.

However, the unexpected uptick by the unemployment rate came as the labor force jumped by 419,000 people compared to a much more modest 142,000-person increase in the household survey measure of employment.

The Labor Department said average hourly employee earnings payrolls climbed by 11 cents to $27.48 in December, reflecting a 3.2 percent increase compared to the same month a year ago.

The annual rate of growth in average hourly employee earnings in December accelerated from the 3.1 percent increase seen in November, reaching its highest level since April of 2009.

Even as the jobs data offset recent concerns about the U.S. economy, Federal Reserve Chairman Jerome Powell noted the central bank "will be patient" with monetary policy as it watches the economy evolve.

Powell stressed that monetary policy is not on a "preset path" after the Fed raised interest rates four times in 2018 and forecast two rate hikes in the new year.

"Particularly with muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves," Powell said.

The Fed chief said the central bank is always prepared to significantly shift the stance of monetary policy if incoming economic data does not meet expectations.

Powell's comments came as part of a joint discussion with former Fed Chairs Janet Yellen and Ben Bernanke at the American Economic Association and Allied Social Science Association annual meeting in Atlanta.

The rally on Wall Street also came after China's Commerce Ministry said China and the U.S. would hold vice ministerial level trade talks in Beijing this week.

Partly reflecting optimism about trade talks between the U.S. and China, steel stocks turned in some of the market's best performances. Reflecting the strength in the sector, the NYSE Arca Steel Index surged up by 6.4 percent.

Considerable strength was also visible among biotechnology stocks, as reflected by the 5.3 percent jump by the NYSE Arca Biotechnology Index.

Regeneron Pharmaceuticals (REGN) posted a standout gain after Guggenheim Partners upgraded its rating on the biotech company's stock to Buy from Neutral.

Oil service stocks also showed a substantial move to the upside on the day, driving the Philadelphia Oil Service Index up by 4.6 percent. The strength in the sector came amid a notable increase by the price of crude oil.

Software, semiconductor and computer hardware stocks also saw significant strength, contributing to the rally by the tech-heavy Nasdaq. Most of the other major sectors also moved higher amid broad based buying interest.

Commodity, Currency Markets

Crude oil futures are jumping $1.11 to $49.07 a barrel after climbing $0.87 to $47.96 a barrel last Friday. Meanwhile, an ounce of gold is trading at $1,294.40, up $8.60 from the previous session’s close of $1,285.80. On Friday, gold fell $9.

On the currency front, the U.S. dollar is trading at 108.39 yen compared to the 108.51 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is valued at $1.1452 compared to last Friday’s $1.1395.

Asia

Asian markets ended on an upbeat note on Monday, with investors indulging in hectic buying amid rising optimism a fresh round of talks between the U.S. and China will help resolve trade disputes between the two countries.

Strong U.S. jobs data and the Federal Reserve Chairman Jerome Powell's remarks last week that the Fed would be patient and flexible in policy decisions also contributed to the gains.

Chinese stocks ended the day firmly in positive territory. The Shanghai Composite Index climbed 0.7 percent, while Hong Kong’s Hang Seng Index advanced 0.8 percent.

The Japanese benchmark Nikkei 225 Index surged up 2.4 percent, led by gains by real estate, machinery, metal, pulp and paper, automobile, glass and ceramics and precision instruments stocks.

Shares from the pharmaceutical, finance, construction and transportation sectors also ended with impressive gains.

Toho Zinc, Takeda Pharmaceuticals, Dentsu Inc., Komatsu, Pacific Metals, JGC Corp., Mitsui Fudosan, Tokyo Electron, Dainippon Screen Manufacturing, SUMCO Corp. and Minebea Mitsum rose 6 to 8 percent.

Mitsubishi Motors, Kawasaki Kishen Kaisha, GS Yuasa, Rakuten Inc., Hitachi, Suzuki Motor, Hino Motors, Panasonic and Advantest Corp. were among the other big gainers.

In the Australian market, information technology, mining and energy shares rose sharply. Financial, industrials and consumer durables shares also ended mostly higher, while pharmaceuticals and telecom shares were a bit sluggish.

Australia's benchmark S&P/ASX 200 Index jumped 1.1 percent, while the broader All Ordinaries Index ended up 1.2 percent.

Emeco Holdings soared more than 10 percent, Syrah Resources spiked 9.8 percent and Seven Group Holdings surged up 8.6 percent. Sandfire Resources and Western Areas gained 8.5 percent and 7.2 percent, respectively.

On the other hand, shares of Healius Limited declined more than 6 percent. Northern Star and St Barbara both ended lower by about 3.2 percent, while Ardent Leisure Group and Evolution Mining lost 2 percent and 1.7 percent, respectively.

South Korea's Kospi ended stronger by 1.3 percent. New Zealand's NZX 50 Index rose 0.7 percent and Taiwan's Weighted Index shot up 2.2 percent, while Indonesia, Malaysia and Singapore were on course to end on a firm note.

In economic news from Asia-Pacific region, the latest survey from the Australia Industry Group revealed the manufacturing sector in Australia slipped into contraction in December, with the index dropping to a score of 49.5 from a reading of 51.3 a month earlier.

The services sector in Japan continued to expand in December, albeit at a slower pace, the latest survey from Nikkei revealed with a PMI score of 51.0. That's down from 52.3 in November, although it remains above the boom-or-bust line of 50 that separates expansion from contraction.

Nikkei also said its composite index slipped to a reading of 52.0 in December from 52.4 in the previous month.

The Bank of Japan said that the monetary base in Japan was up just 4.8 percent year-over-year in December, coming in at 504.2 trillion yen. That was well shy of forecasts for 5.8 percent and down sharply from 6.1 percent in November.

Europe

With traders turning cautious on Monday after the strong gains recorded on the previous session, most of the markets across Europe are in negative territory despite having opened higher on positive cues from Asia.

The vice ministerial level trade talks between the U.S. and China commenced in Beijing today, but the buying momentum witnessed on Friday and in Asian markets earlier in the day is totally absent in European markets.

The lower U.S. stock futures, concerns about the likely impact of the government shutdown in the U.S. and Brexit uncertainty are weighing on the markets in addition to a report showing eurozone investor confidence tumbled to the lowest level in five years.

While the U.K.’s FTSE 100 Index has fallen by 0.5 percent, the German DAX Index and the French CAC 40 Index are down by 0.6 percent and 0.7 percent, respectively.

On the economic front, German manufacturing orders decreased for the first time in four months in November and the fall was worse than expected, preliminary data from Destatis showed.

Factory orders decreased a calendar and seasonally adjusted 1 percent from October, when they grew 0.2 percent. Economists had forecast a modest decline of 0.1 percent. The latest fall was the most severe since a 3.6 percent slump in June.

The data said demand from the euro area plunged 11.6 percent, while orders from other countries grew 2.3 percent.

A preliminary report from Destatis showed German retail sales grew at the fastest pace in seven months in November, exceeding economists' expectations.

Retail sales rose a calendar and seasonally adjusted 1.4 percent from October, when they edged up 0.1 percent. Economists had expected a 0.4 percent increase. On a year-on-year basis, retail sales increased 1.1 percent in November.

Survey data from the behavioral research institute Sentix showed eurozone investor confidence deteriorated for a fifth straight month in January to its lowest level in four years, although the drop was less severe than expected.

The Sentix investor confidence index fell to -1.5 from -0.3, hitting the lowest level since December of 2014. Economists had forecast a score of -2 for January.

The current situation index dropped for a fifth month running to 18, which was lowest level since January of 2017. The expectations index fell for a third straight month -19.3, the lowest score since August of 2012.

"With these data, the eurozone is dangerously close to stagnation," Sentix Managing Director Manfred Hubner said.

Meanwhile, eurozone retail sales grew for a second straight month in November and at a faster-than-expected pace, supported by lower oil prices and rising wages.

Retail sales rose a seasonally adjusted 0.6 percent from October, when sales increased at the same pace, figures from Eurostat showed. Economists had forecast 0.2 percent growth.

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 December.

The ISM’s non-manufacturing index is expected to edge down to 59.0 in December after inching up to 60.7 in November, although a reading above 50 would still indicate growth in service sector activity.

At 12:40 pm ET, Atlanta Federal Reserve President Raphael Bostic is due to participate in a fireside chat about the economic outlook and monetary policy at the Rotary Club of Atlanta.

Stocks In Focus

Shares of Loxo Oncology (LOXO) are spiking higher in pre-market trading after the biopharmaceutical company agreed to be acquired by drug giant Eli Lilly (LLY) for $235 per share in cash or approximately $8 billion.

Software development company Luxoft (LXFT) is also seeing substantial pre-market strength after agreeing to be acquired by IT and consulting services provider DXC Technology (DXC) for $59.00 per share in cash or approximately $2 billion.

Shares of General Electric (GE) may also move to the upside on reports private equity firm Apollo Global Management (APO) is considering a $40 billion bid for the conglomerate’s airplane leasing division.

On the other hand, shares of PG&E Corp. (PCG) are likely to come under pressure after a report from Reuters said the utility is exploring filing for bankruptcy protection for some or all of its business as it faces billions of dollars in liabilities related to fatal wildfires in 2018 and 2017.

Metal products manufacturer Commercial Metals (CMC) may also see initial weakness after reporting fiscal first quarter earnings just below analyst estimates on weaker than expected revenues.
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