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Beyond the Numbers

Trade War Worries May Continue To Weigh On Wall Street
8/5/2019 8:56 AM

The major U.S. index futures are currently pointing to a sharply lower opening on Monday, with stocks likely to extend a recent sell-off.

A drop in the value of the Chinese yuan may weigh on the markets, as the move has further fueled speculation that Beijing is devaluing its currency to counter President Donald Trump’s latest tariff threat.

Trump accused China of “currency manipulation” in a post on Twitter this morning even though his administration has repeatedly declined to officially label China a currency manipulator.

“China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!” Trump tweeted.

A report from Bloomberg News indicating China has asked state-owned companies to suspend purchases of U.S. agricultural products may also raise concerns about the impact of the escalating trade dispute.

After falling sharply early in the session, stocks regained some ground over the course of the trading day on Friday but remained firmly in negative territory. The major averages extended the steep drop seen over the two previous sessions, falling to their lowest closing levels in over a month.

While the major averages all closed in the red, the tech-heavy Nasdaq underperformed its counterparts, tumbling 107.05 points or 1.3 percent to 8,004.07. The Dow fell 98.41 points or 0.4 percent to 26,485.01 and the S&P 500 slid 21.51 points or 0.7 percent to 2,932.05.

For the week, the Nasdaq plunged by 3.9 percent, while the S&P 500 and the Dow plummeted by 3.1 percent and 2.6 percent, respectively.

Concerns about the outlook for the global economy continued to weigh on Wall Street after President Donald Trump announced plans to impose a 10 percent tariff on the remaining $300 billion worth of Chinese imports.

Trump revealed the plan shortly after U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin wrapped up the latest round of trade talks in Shanghai.

The president accused China of failing to follow through on pledges to buy large quantities of U.S. agricultural products and stop the sale of Fentanyl to the U.S.

The new tariffs announced by Trump represent the latest escalation in the trade war between the U.S. and China, which has been a dark cloud over the global economy for over a year.

In typical fashion, China responded to Trump's announcement by threatening to take necessary countermeasures to protect the country's interests.

Traders were also digesting a closely watched Labor Department report showing U.S. job growth slowed in the month of July but came in line with economist estimates.

The report said non-farm payroll employment climbed by 164,000 jobs in July after jumping by a downwardly revised 193,000 jobs in June.

Economists had expected employment to increase by 164,000 jobs compared to the spike of 224,000 jobs originally reported for the previous month.

The Labor Department also said the unemployment rate held at 3.7 percent in July, unchanged from June and in line with economist estimates.

"Overall, this report won't be enough to move the needle much in either direction as far as a September rate cut is concerned, but it reinforces our sense that another move next month isn't yet as sure a thing as the markets are now pricing in," said Andrew Hunter, Senior U.S. Economist at Capital Economics.

Computer hardware stocks turned in some of the worst performances amid broad based weakness, with the NYSE Arca Computer Hardware Index plunging by 5.3 percent to its lowest closing level in well over a month.

NetApp (NTAP) led the sector lower, with the data storage company plummeting by 20.2 percent after warning of weaker than expected fiscal first quarter results.

Significant weakness was also visible among oil service stocks, as reflected by the 3.2 percent nosedive by the Philadelphia Oil Service Index. The continued weakness in the sector came despite a rebound by the price of crude oil.

Networking, steel, telecom and chemical stocks also saw considerable weakness, moving lower along with most of the other major sectors.

Commodity, Currency Markets

Crude oil futures are sliding $0.82 to $54.84 a barrel after jumping $1.71 to $55.66 a barrel last Friday. Meanwhile, an ounce of gold is trading at $1,473.90, up $16.40 from the previous session’s close of $1,457.50. On Friday, gold spiked $25.10

On the currency front, the U.S. dollar is trading at 106.11 yen compared to the 106.59 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is valued at $1.1179 compared to last Friday’s $1.1108.

Asia

Asian stocks succumbed to heavy selling pressure on Monday after China's central bank allowed its yuan to fall below the politically sensitive level of 7 to the U.S. dollar, fueling speculation that Beijing is devaluing its currency to counter U.S. President Donald Trump's latest tariff threat.

China's Shanghai Composite Index tumbled 46.34 points or 1.6 percent to 2,821.50 ahead of July trade and inflation data due this week. Hong Kong's Hang Seng Index plunged 767.26 points or 2.9 percent to 26,151.32 as businesses braced for major disruptions amid a general strike in the city.

Hong Kong's embattled leader Carrie Lam has warned that mass protests have pushed the region to the brink of a “very dangerous situation.”

China's private sector continued to expand at a marginal pace in July, survey data from IHS Markit showed today. The Caixin composite output index rose to 50.9 in July from 50.6 in June.

The services Purchasing Managers' Index fell to 51.6 from 52.0 in June. This was the lowest score in five months.

Japanese shares closed sharply lower to hit a two-month low as the yen strengthened and companies such as Kobe Steel and Sysmex posted dismal earnings.

The Nikkei 225 Index ended down 366.87 points or 1.7 percent at 20,720.29, while the broader Topix closed 1.8 percent lower at 1,505.88, its lowest closing level in two months.

Exporters such as Sony, Daikin Industries, Nissan and Panasonic lost 3-4 percent as a flight to safety lifted the yen up by as much as 0.8 percent.

Kobe Steel plunged 15.2 percent to hit a seven-year low after the steelmaker cut its full-year profit forecast. Likewise, medical device maker Sysmex lost 12.5 percent after posting weaker than expected profits for the April-June quarter.

Market heavyweight SoftBank gave up 3.5 percent and Fast Retailing dropped 1.1 percent. On the positive side, carmaker Subaru climbed 3.9 percent after reporting a 48 percent spike in first quarter operating profit.

Japan's service sector began the third quarter with moderate growth in July, survey results from IHS Markit showed. The Jibun Bank services Purchasing Managers' Index fell slightly to 51.8 in July from 51.9 in June.

Australian markets extended losses into a fourth straight session as global growth worries on the back escalating trade tensions between the U.S. and China took a toll on mining stocks. Investors also digested weak data showing that Australia's service sector fell deeply into contraction in July.

The benchmark S&P/ASX 200 Index slumped 128.30 points or 1.9 percent to 6,640.30, while the broader All Ordinaries Index ended down 135.50 points or 2 percent at 6,710.60.

The big four banks ended down between 0.8 percent and 1.7 percent ahead of a RBA policy meeting on Tuesday.

Falling iron ore and copper prices pulled down miners, with mining heavyweights BHP and Rio Tinto falling around 3.5 percent each. Smaller rival Fortescue Metals Group slumped 7.2 percent.

Rare earths miner Lynas Corp. plunged 5.6 percent on reports of new hurdles to obtaining a permit for its Malaysian plant.

Meanwhile, Oil Search advanced 2.9 percent after Papua New Guinea signaled it backed a previously agreed multibillion dollar liquefied natural gas deal involving the company.

Seoul stocks hit a three-year low as the yuan's depreciation sparked fears of a currency war. The Kospi plummeted 51.15 points or 2.6 percent to 1,946.98, extending losses for a fourth day and hitting the lowest level since January 3.

Market heavyweight Samsung Electronics Co. fell 2.2 percent, chemical firm LG Chem lost 4.8 percent and national carrier Korean Air Lines Co. retreated 4.1 percent.

Europe

European stocks have plunged on Monday to extend losses from the previous session after China's central bank allowed its yuan to fall below the politically sensitive level of 7 to the U.S. dollar, fueling speculation that Beijing is devaluing its currency to counter U.S. President Donald Trump's latest tariff threat.

Weak regional data also dented investor sentiment. Euro area investor confidence deteriorated sharply in August to its lowest level in nearly five years amid a steep drop in the current situation assessment and expectations, survey data from the behavioral research institute Sentix showed.

The investor confidence index of the survey tumbled to -13.7 from -5.8 in July, hitting its lowest level since October 2014. Economists had forecast a score of -7.

Euro area private sector growth softened largely due to a deepening downturn in manufacturing activity in July, final data from IHS Markit showed.

The final composite output index fell to 51.5 in July from 52.2 in June. The reading came in line with the preliminary estimate.

While the U.K.’s FTSE 100 Index has plunged by 2.1 percent, the French CAC 40 Index is down by 1.9 percent and the German DAX Index is down by 1.5 percent.

Tariff-sensitive automakers BMW, Daimler and Volkswagen have fallen after Trump on Friday blasted the European Union for its use of trade barriers.

Metro AG has also tumbled after Czech billionaire Daniel Kretinsky's investment vehicle denied media reports it was exploring raising its takeover offer for the German retailer and wholesaler.

Evonik shares have fallen after the U.S. Federal Trade Commission announced it would file a lawsuit seeking to block the company's proposed acquisition of PeroxyChem.

Asia-focused lender HSBC Holdings has also dropped even though the bank reported higher profit in its first half with strong revenues in most segments.

Further, the lender announced the departure of Chief Executive Officer John Flint and said it intends to initiate a share buy-back of up to $1 billion.

Advertising giant WPP has also moved to the downside after saying it has merged a number of its business entities to simplify the company.

U.S. Economic Reports

The Institute for Supply Management is scheduled to release its report on activity in the service sector in the month of July at 10 am ET.

The non-manufacturing index is expected to inch up to 55.5 in July after dropping to 55.1 in June, with a reading above 50 indicating growth in the service sector.

Stocks In Focus

Shares of Sohu.com (SOHU) are moving significantly lower in pre-market trading after the Chinese internet company reported a wider than expected second quarter loss on revenues that missed analyst estimates.

Discount retailer Dollar Tree (DLTR) may also see initial weakness after Deutsche Bank downgraded its rating on the company’s stock to Hold from Buy.

On the other hand, shares of Tyson Foods (TSN) are seeing pre-market strength after the meat producer reported fiscal third quarter earnings that beat analyst estimates.
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