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Beyond the Numbers

Potential Yield Curve Inversion May Generate Additional Selling Pressure
8/13/2019 8:59 AM

The major U.S. index futures are pointing to a lower opening on Tuesday, with stocks likely to see further downside following the sell-off seen in the previous session.

The downward momentum on Wall Street comes amid continued concerns about the escalating U.S.-China trade war and rising tensions in Hong Kong.

The geopolitical concerns have led traders to seek safe haven assets such as U.S treasuries, resulting in a slump in U.S. bond yields.

The yield on the benchmark ten-year note is threatening to drop below the yield on the two-year note, which is widely seen as indicator of an impending recession.

Stocks moved sharply lower over the course of the trading session on Monday, adding to the losses posted last week. The major averages came under pressure early in the session and slid more firmly into negative territory as the day progressed.

While the major averages climbed off their worst levels going into the close, they still posted steep losses on the day. The Dow plunged 391.00 points or 1.5 percent to 25,896.44, the Nasdaq tumbled 95.73 points or 1.2 percent to 7,863.41 and the S&P 500 slumped 35.96 points or 1.2 percent to 2,882.69.

The sell-off on Wall Street came amid worries about a prolonged trade war between the U.S. and China after President Donald Trump recently indicated he feels no sense of urgency to resolve the dispute.

Trump told reporters last Friday that he is "not ready to make a deal" with China and suggested the U.S. could skip the next round of trade talks in September.

"We'll see whether or not we keep our meeting in September. If we do, that's fine. If we don't, that's fine," Trump said. "But it's time that somebody does what we're doing."

Trump denied that Americans are paying the price for his trade war with China, arguing that Beijing's efforts to depress their currency prove that the Chinese are "paying for it."

"I want them to do well. But as of this moment, they're having the worst year that they've had in many, many years — in decades," he added. "And really, we're just bringing the system back into order."

Concerns about the impact of increasingly violent protests in Hong Kong also weighed on stocks, with the Hong Kong International Airport canceling all departing flights due to the disruption caused by protesters.

The pro-democracy demonstrations in Hong Kong have intensified following allegations of unnecessary police violence on Sunday.

The geopolitical concerns increased the appeal of safe haven assets like bonds, resulting in a steep drop in U.S. treasury yields. The yield on the benchmark ten-year note tumbled to its lowest closing level in almost three years.

Steel stocks turned in some of the market's worst performances on the day amid concerns about the impact of the U.S.-China trade war.

Reflecting the weakness in the sector, the NYSE Arca Steel Index plunged by 3.1 percent to its lowest closing level since November of 2016.

The drop in bond yields also contributed to considerable weakness among financial stocks, with the NYSE Arca Broker/Dealer Index and the KBW Bank Index slumping by 2.2 percent and 2.1 percent, respectively.

Transportation, biotechnology, and chemical stocks also saw significant weakness, moving lower along with most of the other major sectors.

Commodity, Currency Markets

Crude oil futures are falling $0.44 to $54.49 barrel after rising $0.43 to $54.93 a barrel on Monday. Meanwhile, after climbing $8.70 to $1,523.20 ounce in the previous session, gold futures are jumping $13.20 to $1,530.40 an ounce.

On the currency front, the U.S. dollar is trading at 105.18 yen compared to the 105.30 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.1221 compared to yesterday’s $1.1214.

Asia

Asian stocks fell on Tuesday as a prolonged U.S.-China trade war, escalating tensions in Hong Kong after months of political unrest and Argentine President Mauricio Macri's loss in primary elections sent investors scrambling for safe haven assets such as the yen, gold and bonds.

China's Shanghai Composite Index gave up 17.73 points or 0.6 percent to finish at 2,797.26 as bank lending data disappointed and investors awaited key reports on retail sales, industrial production and the jobless rate due on Wednesday.

Hong Kong's Hang Seng Index plunged 543.42 points or 2.1 percent to 25,281.30 as anti-government demonstrators staged another protest at Hong Kong's airport on Tuesday, seeking greater democratic freedom.

Japanese shares hit a one-week low as traders returned to their desks after a long holiday weekend. The Nikkei 225 Index tumbled 229.38 points or 1.1 percent to 20,455.44, while the broader Topix slumped 1.2 percent to 1,486.57.

Exporters TDK Corp. and Subaru Corp. lost 3-4 percent as the yen hit a nearly seven-month high against the dollar, hurt by fresh jitters about the U.S.-China trade war, turmoil in Hong Kong and fears of a full-blown financial crisis in Argentina.

Tire maker Bridgestone slid 3.2 percent after lowering its earnings and sales forecasts for the full fiscal year. Steelmaker JFE Holdings plunged 6.3 percent and liquid crystal display maker Japan Display plummeted 7.1 percent on weak earnings.

Australian markets drifted lower, dragged down by healthcare stocks. The benchmark S&P/ASX 200 Index dropped 21.80 points or 0.3 percent to 6,568.50, while the broader All Ordinaries Index ended down 22 points or 0.3 percent at 6,648.10.

Healthcare stocks such as CSL, Mayne Pharma and Cochlear fell between 1.5 percent and 3.4 percent. Miners bounced back from losses in the previous session, with Rio Tinto rising 0.6 percent, while smaller rival Fortescue Metals Group jumped as much as 3.6 percent.

Fund manager Challenger rallied 2.5 percent after confirming its second-half earnings guidance.

Westpac Banking Corp. edged down 0.3 percent as an Australian court dismissed a case by the corporate regulator against the bank. The other three banks ended down between 0.3 percent and 0.6 percent.

Magellan Financial Group entered into a trading halt after announcing a A$275 million capital raising.

In economic news, a measure of Australia's business conditions weakened in July, reflecting decreases across most industries, while confidence edged higher, survey data from the National Australia Bank showed.

Seoul stocks closed lower to snap a three-day winning streak, reflecting investors' diminished risk appetite amid massive protests in Hong Kong, rising geopolitical risks around the globe and mounting concerns over an economic slowdown.

The benchmark Kospi ended down 16.46 points or 0.9 percent at 1,925.83. Samsung Electronics, LG Electronics, Hyundai Motor and POSCO all ended down over 1 percent.

Europe

European stocks have fallen on Tuesday, extending losses from the previous session as trade worries, escalating tensions in Hong Kong after months of political unrest and Argentine President Mauricio Macri's loss in primary elections dented investors' appetite for risk.

Market participants also kept a close eye on Italy, where the Senate meets today to set a crucial date for a no-confidence vote that could spell the end of Prime Minister Giuseppe Conte's populist government.

While the German DAX Index has tumbled by 1.1 percent, the U.K.’s FTSE 100 Index and the French CAC 40 Index are both down by 0.8 percent.

Automakers BMW, Daimler, Renault and Peugeot have slumped after industry data showed Chinese auto sales sank again in July, extending a yearlong contraction in the industry's biggest global market.

Luxury carmaker Aston Martin has also tumbled. According to the Financial Times, hedge funds have taken record short positions in the debt and equity of the company.

Henkel shares have also plunged after the German consumer goods firm slashed its annual outlook for sales and earnings, citing a slowdown in China.

On the other hand, meal-kit delivery firm HelloFresh has soared as it reported its first quarterly underlying operating profit since it listed in 2017.

In economic news, German investor confidence dropped sharply in August to its lowest level since the end of 2011, survey data from the ZEW - Leibniz Centre for European Economic Research showed.

The ZEW Indicator of Economic Sentiment for Germany tumbled to -44.1 in August from -24.5 in July, hitting its lowest level since December 2011. Economists had forecast a score of -28.

The U.K. unemployment rate increased in three months to June, while average earnings grew at the fastest pace in eleven years, data from the Office for National Statistics showed.

The jobless rate increased by 0.1 percentage points sequentially to 3.9 percent in the three months to June. Unemployment rose by 31,000 to 1.33 million.

In the three months to June, employment increased by 115,000 to reach a record 32.81 million, but the employment rate remained unchanged at 76.1 percent.

U.S. Economic Reports

Consumer prices in the U.S. rose in line with economist estimates in the month of July, according to a report released by the Labor Department, although the report also showed another bigger than expected increase in core consumer prices.

The Labor Department said its consumer price index climbed by 0.3 percent in July after inching up by 0.1 percent in both May and June. Economists had expected prices to rise by 0.3 percent.

Excluding food and energy prices, core consumer prices also rose by 0.3 percent for the second consecutive month, while economists had expected a 0.2 percent uptick.

Stocks In Focus

Shares of Advance Auto Parts (AAP) are moving significantly lower in pre-market trading after the auto parts retailer reported weaker than expected second quarter results and lowered the high end of its full-year guidance.

Tencent Music (TME) may also see initial weakness after the China-based music service reported second quarter earnings that beat estimates but revenues that fell short of expectations.

On the other hand, shares of Elanco Animal Health (ELAN) are seeing notable pre-market strength after reporting better than expected second quarter earnings.
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