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Beyond the Numbers

Ongoing Trade Concerns May Weigh On Wall Street
5/20/2019 9:02 AM

The major U.S. index futures are currently pointing to a lower opening on Monday, with stocks likely to see some further downside following the pullback seen late in the previous session.

Ongoing concerns about the escalating U.S.-China trade dispute are likely to weigh on Wall Street after Google suspended some of its business with Chinese tech giant Huawei.

Google has cut Huawei off from business involving the transfer of hardware, software and technical services, complying with an order by President Donald Trump blocking the sale or transfer of U.S. technology to Huawei.

“We are complying with the order and reviewing the implications,” a Google spokesperson said, noting services such as Google Play and the security protections from Google Play Protect will continue to function on existing Huawei devices.

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

Reports on new and existing home sales and durable goods orders are likely to attract attention in the coming days along with the minutes of the latest Federal Reserve meeting.

Stocks showed wild swings over the course of the trading session on Friday before ending the day mostly lower. The major averages recovered from an initial move to the downside only to pull back sharply late in the session.

At the end of the day, the major averages were all firmly in negative territory. The Dow fell 98.68 points or 0.4 percent to 25,764.00, the Nasdaq slumped 81.76 points or 1 percent to 7,816.28 and the S&P 500 dropped 16.79 points or 0.6 percent to 2,859.53.

The major averages also closed lower for the week. The Nasdaq tumbled by 1.3 percent, while the Dow and the S&P 500 slid by 0.7 percent and 0.8 percent, respectively.

Reflecting recent market sensitivity to trade-related news, the late-day pullback came on the heels of a CNBC report indicating negotiations between the U.S. and China appear to have stalled.

Citing two sources briefed on the status of trade talks, CNBC said scheduling for the next round of negotiations is "in flux" because it is unclear what the two sides would discuss.

Sources told CNBC discussions regarding scheduling the next round of talks have not taken place since President Donald Trump signed an executive order ramping up scrutiny of Chinese telecom companies.

Lingering concerns about the escalating trade dispute between the U.S. and China also contributed to the initial weakness on Wall Street.

While Trump has sought to blame China for backing out of a nearly completed trade deal, a spokesperson for China's Ministry of Commerce claims the U.S. is responsible for serious setbacks in the trade talks.

Commerce Ministry spokesperson Gao Feng accused the Trump administration of "bullying behavior" with a recent increase in tariffs, according to state-run Chinese news agency Xinhua.

"It is regrettable that the U.S. side unilaterally escalated trade disputes, which resulted in severe negotiating setbacks," Gao said.

He added, "We urge the U.S. side to correct wrongdoings as soon as possible to avoid causing heavier damages to businesses and consumers in both countries and dragging down the global economy.”

However, concerns about trade waned after the Trump administration officially delayed imposing tariffs on imported automobiles and parts for up to six months, confirming media reports from earlier this week.

A White House statement noted Trump has directed U.S. Trade Representative Robert Lighthizer to negotiate agreements to address the national security threat posed by auto imports.

On the U.S. economic front, the University of Michigan released a report showing a substantial improvement in consumer sentiment in May, although the data was recorded mostly before trade negotiations with China collapsed.

The preliminary report showed the consumer sentiment index surged up to 102.4 in May from 97.2 in April, reaching its highest level in fifteen years. Economists had expected the index to inch up to 97.5.

Oil service stocks showed a substantial move to the downside over the course of the trading session, dragging the Philadelphia Oil Service Index down by 3.2 percent. The sell-off by oil service stocks came amid a modest decrease by the price of crude oil.

Significant weakness also emerged among semiconductor stocks, as reflected by the 2 percent slump by the Philadelphia Semiconductor Index.

Natural gas, oil producer, and networking stocks also saw considerable weakness on the day, notable strength was visible among computer hardware stocks.

Shares of Cray Inc. (CRAY) soared 22.5 percent after she supercomputer maker agreed to be acquired by Hewlett Packard Enterprise (HPE) for $1.3 billion in cash.

Commodity, Currency Markets

Crude oil futures are inching up $0.04 to $62.80 a barrel after slipping $0.11 to $62.76 a barrel last Friday. Meanwhile, after slumping $10.50 to $1,275.70 an ounce in the previous session, gold futures are edging up $0.70 to $1,276.40 an ounce.

On the currency front, the U.S. dollar is trading at 109.87 yen compared to the 110.08 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is valued at $1.1164 compared to last Friday’s $1.1158.

Asia

Asian stocks ended mixed on Monday as trade worries persisted, offsetting a surprise election victory for Australia's pro-coal ruling coalition and upbeat Japanese GDP data.

Markets remained fragile after Chinese foreign minister Wang Yi told U.S. Secretary of State Mike Pompeo in a call that negotiating on an equal footing is the only way to solve pressing trade issues.

Chinese shares closed lower as trade war fears simmered. The benchmark Shanghai Composite Index dropped 11.69 points or 0.4 percent to 2,870.60, while Hong Kong's Hang Seng Index ended down 158.85 points or 0.6 percent at 27,787.61.

China's offshore yuan strengthened after the country's central bank said that it would maintain the stability of its yuan within a reasonable and balanced range.

Japanese shares inched higher as first quarter GDP data topped forecasts. Growth in the nation's economy unexpectedly accelerated to an annualized 2.1 percent in the first quarter, defying expectations for a 0.2 percent contraction. However, the surprise expansion was mostly caused by imports declining faster than exports.

The Nikkei 225 Index rose 51.64 points or 0.2 percent to 21,301.73, while the broader Topix index closed nearly flat at 1,554.92. Exporters edged higher as the yen weakened to a two-week low versus the dollar. Honda Motor rose 0.6 percent, Panasonic added 0.7 percent and Canon gained 1.1 percent.

Technology firms followed their U.S. peers lower, with electronics and semiconductor company Tokyo Electron tumbling by 3.1 percent.

Paper manufacturing company Hokuetsu Corp soared 9 percent after forecasting a 62.9 percent jump in operating profit for the year ending March 2020.

Australian stocks hit their highest level since December 2007 following the ruling conservative party's surprise victory in the country's federal election.

The benchmark S&P/ASX 200 Index jumped 110.80 points or 1.7 percent to 6,476.10, while the broader All Ordinaries Index surged up 1.6 percent to 6,564.70.

Financials did particularly well, with the big four banks spiking 6-9 percent. Miners and energy stocks turned in a mixed performance despite strong gains in iron ore and crude oil prices in recent sessions.

Chemicals and fertilizer manufacturer Incitec Pivot tumbled 2.7 percent after it reported a 72 percent slump in profit for the first half of the year.

South Korea's shares came off their highs to end little changed with a negative bias as foreign investors continued to offload shares for an eighth consecutive session, marking the longest selling spree since November last year.

Europe

European stocks have moved notably lower on Monday, with airline and technology stocks coming under selling pressure after Ryanair warned on profits and China said it is in no hurry to resume trade talks with the U.S.

Alphabet Inc.'s Google has suspended business with Huawei and German chipmaker Infineon Technologies also reportedly suspended shipments to the Chinese telecom giant, adding another dimension to the U.S.-China trade war.

While the U.K’.s FTSE 100 Index has slumped by 0.9 percent, the German DAX Index and the French CAC 40 Index are both down by 1.6 percent.

Infineon shares have moved sharply lower on the day, while AMS and STMicroelectronics are also seeing substantial weakness.

German lender Deutsche Bank has slumped after reports that it ignored employees' calls to report multiple transactions involving entities controlled by U.S. President Trump and his son-in-law Jared Kushner to a federal financial crimes watchdog.

Ryanair Holdings has also fallen after it reported its weakest annual profit in four years and warned of a worse trading environment.

Shares of Low & Bonar have plummeted after the performance materials group warned that its first-half results would be materially behind that of the prior year.

On the other hand, Nokia and Ericsson have shown strong moves to the upside on expectations they could benefit from Huawei's difficulties.

In economic news, the euro area current account surplus dropped to a seasonally adjusted 25 billion euros in March from 28 billion euros in February due to a drop in primary income, data from the European Central Bank showed.

The visible trade surplus decreased to 24 billion euros from 26 billion euros, while the services surplus rose to 8 billion euros from 7 billion euros.

Survey data from IHS Markit showed British households' financial wellbeing deteriorated at the fastest pace since September 2017.

The household finance index, which measures households' overall perception of financial wellbeing, dropped to 42.5 in May from April's three-month high of 43.8.

The score indicated the strongest level of pessimism towards current financial wellbeing among U.K. households since September 2017.

U.S. Economic Reports

No major U.S. economic data is scheduled to be released today, although reports on new and existing home sales and durable goods orders are likely to attract attention in the coming days along with the release of the minutes of the latest Federal Reserve meeting.

Philadelphia Fed President Patrick Harker is due to deliver a speech on the U.S. economic outlook at the Management Science’s 65th Anniversary Conference in Boston, Massachusetts, at 9:30 am ET.

At 1 pm ET, Fed Vice Chairman Richard Clarida and New York Fed President John Williams are scheduled to participate in a roundtable discussion on monetary policy strategy, tools, and communication practices in New York.

Stocks In Focus

Intel (INTC), Xilinx (XLNX), and Qualcomm (QCOM) are seeing considerable pre-market weakness after a report from Bloomberg said the chipmakers told employees they will not supply Huawei until further notice.

Shares of Lyft (LYFT) may also move to the downside after a group of investors filed a lawsuit accusing the ride hailing company of making “false and misleading” statements ahead of its initial public offering.

On the other hand, shares of International Game Technology (IGT) may move to the upside after the gaming and lottery company reported a first quarter profit compared to a year-ago loss.
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