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Beyond the Numbers

Stocks May See Further Downside Amid Lingering Trade Concerns
5/23/2019 8:59 AM

The major U.S. index futures are pointing to a lower opening on Thursday, with stocks likely to extend the downward move seen in the previous session.

Lingering trade concerns are likely to weigh on Wall Street amid further indications of rising tensions between the U.S. and China.

During a weekly briefly, Chinese Commerce Ministry spokesman Gao Feng said the Trump administration must “show sincerity and correct their wrong actions” if the U.S. wants trade talks to continue.

“Negotiations can only continue on the basis of equality and mutual respect,” Gao said, noting that China is closely monitoring developments and preparing a necessary response.

U.S. and China trade talks collapsed earlier this month as President Donald Trump followed through on a threat to raise tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent.

The Trump administration also blocked U.S. companies from doing business with Chinese telecom giant Huawei but recently gave the company a 90-day reprieve.

With both sides seemingly unwilling to back down, traders are becoming increasingly wary of the impact of the trade dispute on the global economy.

Following the notable upward move seen on Tuesday, stocks gave back some ground during the trading day on Wednesday. Selling pressure was relatively subdued, however, limiting the downside for the major averages.

The major averages ended the session off their worst levels of the day but still firmly in the red. The Dow slid 100.72 points or 0.4 percent to 25,776.61, the Nasdaq fell 34.88 points or 0.5 percent to 7,750.84 and the S&P 500 dipped 8.09 points or 0.3 percent to 2,856.27.

The moderate weakness on Wall Street came as traders continued to worry the trade dispute between the U.S. and China is escalating into a full-fledged trade war.

A report from the South China Morning Post said Chinas is re-examining the entire bilateral economic relationship between the U.S. and China.

The SCMP said Chinese government advisers are highlighting the risk of sourcing critical supplies from an increasingly hostile U.S. following the Trump administration's recent move to blacklist Chinese tech giant Huawei.

Mei Xinyu, a fellow at the research institute under China's Ministry of Commerce, told the SCMP that Beijing should prepare for the worst-case scenario to defend its rights in climbing up the global value chain through technological catch-up.

"Even if a deal is reached, it could be torn apart [by President Donald Trump] easily at any time," Mei said, comparing the current trade talk deadlock to the Panmunjom peace talks during the Korean War.

Adding to the trade concerns, Treasury Secretary Steven Mnuchin told CNBC's Ylan Mui the U.S. has no plans to go to Beijing to resume trade negotiations.

Stocks remained mostly lower following the release of the minutes of the latest Federal Reserve meeting, which suggested the central bank is in no rush to alter the path of interest rates.

The minutes showed members agreed that a patient approach to determining future adjustments to rates would likely remain appropriate for "some time."

Citing an environment of moderate U.S. economic growth and muted inflation pressures, the Fed expects to remain patient even if global economic and financial conditions continued to improve.

The Fed decided to leave interest rates unchanged at the two-day meeting ended May 1st, as uncertainties affecting the U.S. and global economic outlooks had receded but inflation pressures remained muted.

Oil service stocks showed a substantial move to the downside on the day, dragging the Philadelphia Oil Service Index down by 3.3 percent.

The sell-off by oil service stocks came as the price of crude oil for July delivery plunged following the release of a report showing an unexpected weekly increase in crude oil inventories.

Considerable weakness was also visible among semiconductor stocks, as reflected by the 2.1 percent slump by the Philadelphia Semiconductor Index.

Qualcomm (QCOM) posted a steep loss after a federal judge ruled the communications chip maker violated antitrust law.

Natural gas, transportation, and steel stocks also saw notable weakness on the day, while strength emerged among pharmaceutical and utilities stocks.

Commodity, Currency Markets

Crude oil futures are tumbling $1.40 to $60.02 a barrel after plunging $1.72 to $61.42 a barrel a barrel on Wednesday. Meanwhile, an ounce of gold is trading at $8.10 to $1,282.30 compared to the previous session's close of $1,274.20. On Wednesday, gold ticked up $1.

On the currency front, the U.S. dollar is trading at 110.03 yen compared to the 110.36 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.1141 compared to yesterday’s $1.1150.

Asia

Asian stocks ended broadly lower on Thursday as fears the U.S.-China trade conflict is spiraling into a technology cold war dashed hopes of a deal before or at the G20 summit to be held next month in Japan.

China's Shanghai Composite Index slumped 39.19 points or 1.4 percent to 2,852.52 and Hong Kong's Hang Seng Index fell tumbled 438.81 points or 1.6 percent to 27,267.13 amid the stand-off between the world's two largest economies.

Japanese shares ended notably lower as tech stocks sold off on reports the U.S. is considering sanctions on video surveillance firm Hikvision. The Nikkei 225 Index dropped 132.23 points or 0.6 percent to 21,151.14, while the broader Topix closed 0.4 percent lower at 1,540.58.

Index heavyweight SoftBank Group plunged 5.3 percent after announcing it would postpone launching new smartphones made by Huawei Technologies Co. Tech stocks such as Advantest, TDK Corp and Tokyo Electron lost 2-7 percent.

Inpex Corp. plummeted 5 percent as oil extended the drop from the previous session amid surging U.S. crude inventories.

On the other hand, Daiichi Sankyo Co rose over 1 percent on a Nikkei report that the drugmaker is in talks with several companies to sell its wholly owned over-the-counter drug unit for around 100 billion yen ($900 million).

In economic news, the manufacturing sector in Japan fell into contraction in May, the latest survey from Nikkei revealed in its preliminary report - posting a manufacturing PMI score of 49.6, down from 50.2 in April.

Australian markets declined on fears of a protracted U.S.-China trade war. The benchmark S&P/ASX 200 Index dipped 18.90 points or 0.3 percent to 6,491.80, while the broader All Ordinaries Index ended down 13.80 points or 0.2 percent at 6,584.30.

Mining heavyweight BHP fell 2 percent and Rio Tinto shed 0.7 percent despite record high iron ore prices. Fortescue Metals Group rose 1 percent after falling sharply the previous day on going ex-dividend.

The big four banks fell between 1.1 percent and 2.3 percent. Energy stocks Woodside Petroleum, Oil Search, Origin Energy and Santos gave up 1-2 percent as oil prices extended bigger falls from the previous session.

Construction materials supplier Adelaide Brighton soared 6.3 percent after Australia's prudential regulator proposed easing of certain lending criteria for home loans.

Wesfarmers advanced 1.6 percent on news it has moved a step closer to acquiring lithium miner Kidman Resources.

Seoul stocks ended lower amid the intensifying trade dispute between the U.S. and China. The benchmark Kospi slid 5.27 points or 0.3 percent to 2,059.59. SK Hynix and Posco fell over 1 percent.

Europe

European stocks have come under pressure on Thursday as trade worries persist and the European Parliament elections kicked off in polls that could challenge the Brussels consensus.

British chip designer ARM joined the growing list of global companies to disengage with Huawei, raising concerns a protracted trade war could derail global economic growth.

The British pound is lingering near four-month lows after a key ally resigned from Prime Minister Theresa May's cabinet late on Wednesday, adding to pressure on her to step down. A report from The Times said May is likely to announce her departure from office on Friday.

While the U.K.’s FTSE 100 Index has slumped by 1.3 percent, the French CAC 40 Index and the German DAX Index are both down by 1.7 percent.

Miners BHP, Glencore and Antofagasta have moved notably amid an escalating trade dispute between the U.S. and China.

German automaker Daimler and lender Commerzbank have also moved to the downside on the day on going ex-dividend.

Deutsche Bank has also tumbled after saying it has found a glitch in computer systems that retroactively scan corporate clients' transactions for suspicious activity.

On the other hand, Merlin Entertainments has jumped after U.S. activist investment group ValueAct urged the owner of Madame Tussauds and Legoland to go private.

Serco Group has also soared after agreeing to buy the Naval Systems Business Unit and related contracting entities from Alion Science & Technology Corp. for $225 million.

In economic news, German GDP grew 0.4 percent sequentially in the first quarter after staying flat in the fourth quarter and contracting 0.2 percent in the third quarter of 2018, detailed results from Destatis showed.

The German headline IFO business climate index dropped to 97.9 in May from 99.2 last month.

The euro area private sector expanded in May but the pace of growth remained subdued, survey data from IHS Markit showed.

The composite output index rose marginally to 51.6 in May from 51.5 in April. The index was forecast to rise to 51.7.

U.S. Economic Reports

First-time claims for U.S. unemployment benefits unexpectedly edged lower in the week ended May 18th, according to a report released by the Labor Department.

The report said initial jobless claims dipped to 211,000, a decrease of 1,000 from the previous week’s unrevised level of 212,000.

The modest decrease came as a surprise to economists, who had expected initial jobless claims to inch up to 215,000.

At 10 am ET, the Commerce Department is scheduled to release its report on new home sales in the month of April. New home sales are expected to drop to an annual rate of 675,000 in April after jumping to a rate of 692,000 in March.

The Treasury Department is due to announce the details of next week’s auctions of two-year, five-year, and seven-year notes at 1 pm ET.

At 1 pm ET, Richmond Fed President Thomas Barkin, Atlanta Fed President Raphael Bostic, San Francisco Fed President Mary Daly and Dallas Fed President Robert Kaplan are due to participate in a policymaker roundtable at a Dallas Fed conference.

Stocks In Focus

Shares of NetApp (NTAP) are moving sharply lower in pre-market trading after the data storage company reported weaker than expected fiscal fourth quarter results and provided disappointing guidance.

Credit monitoring giant Equifax (EFX) could also see initial weakness after Moody’s slashes its rating outlook on the company to negative from stable due to cybersecurity issues.

On the other hand, shares of L Brands (LB) are seeing significant pre-market strength after the Victoria’s Secret parent reported fiscal first quarter results that exceeded analyst estimates on both the top and bottom lines.

Cosmetics company Avon Products (AVP) is also jumping in pre-market trading after agreeing to be acquired by Brazil’s Natura in a deal valuing the company at $3.7 billion.
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