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Beyond the Numbers

Stimulus Optimism May Generate Early Buying Interest
8/19/2019 9:04 AM

The major U.S. index futures are currently pointing to a higher opening on Monday following the substantial volatility seen in the markets last week.

Continued optimism about new global stimulus may contribute to initial buying interest after the People's Bank of China said it would use market-based reform methods to help lower real lending rates and prop up a slowing economy.

News that President Donald Trump’s administration is once again delaying restrictions on Chinese tech giant Huawei may also contribute to early strength on Wall Street.

Commerce Secretary Wilbur Ross revealed the news in an appearance on the Fox Business Network, announcing a “temporary general license” set to expire on Monday will be extended for another 90 days.

The move will allow Huawei to continue purchasing supplies from U.S. companies despite being placed on an economic blacklist back in May.

“There is another 90 days for the U.S. telecom companies, some of the rural companies are dependent on wild ways,” Ross said. “So we're giving them a little more time to wean themselves off. But there are no specific licenses being granted for anything.”

The upward momentum also comes after Trump’s economic advisers took to the Sunday talk shows to downplay concerns about a possible recession.

Trump himself told reporters that he does not foresee an economic downturn even after last week’s yield curve inversion, which is widely seen as an early recession indicator.

“I don’t think we’re having a recession,” Trump said. “We’re doing tremendously well. Our consumers are rich. I gave a tremendous tax cut and they’re loaded up with money.”

Following the lackluster performance seen on Thursday, stocks moved sharply higher over the course of the trading day on Friday. The major averages all climbed firmly into positive territory after ending Thursday's trading mixed.

The major averages reached new highs late in the session but pulled back going into the close. The Dow jumped 306.62 points or 1.2 percent to 25,886.01, the Nasdaq soared 129.38 points or 1.7 percent to 7,895.99 and the S&P 500 surged up 41.08 points or 1.4 percent to 2,888.68.

Despite the strong gains on the day, the major averages moved notably lower for the week. The Dow tumbled by 1.5 percent, the S&P 500 slumped by 1 percent and the Nasdaq slid by 0.8 percent.

The rally on Wall Street partly reflected optimism about the world's central banks providing aggressive stimulus in order to prevent a global recession.

European Central Bank official Olli Rehn helped inspire confidence after expressing the need for a significant easing package in September to support the flagging eurozone economy.

The expectations for more stimulus contributed to a pullback by U.S. treasuries and a subsequent increase in bond yields.

The yield on the benchmark ten-year note dropped below the two-year yield on Wednesday, sparking fears of an impending recession and a sell-off on Wall Street.

Meanwhile, traders largely shrugged off a report from the University of Michigan showing a significant deterioration in U.S. consumer sentiment in August.

The report said the consumer sentiment index tumbled to 92.1 in August after inching up to 98.4 in July. Economists had expected the index to dip to 97.2.

With the much steeper than expected drop, the consumer sentiment index slumped to its lowest level since hitting 91.2 in January.

The deterioration in consumer sentiment came amid concerns about the proposed increase in tariffs on Chinese imports as well as the reasoning behind the Federal Reserve's interest rate cut.

"The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession," said Surveys of Consumers chief economist Richard Curtin.

He added, "Consumers concluded, following the Fed's lead, that they may need to reduce spending in anticipation of a potential recession."

Curtin said consumers are likely to reduce their pace of spending but still help keep the economy out of recession at least through mid-2020.

A separate report from the Commerce Department showed an unexpected slump in housing starts in July but a sharper than expected increase in building permits.

The report said housing starts tumbled by 4.0 percent to an annual rate of 1.191 million from the revised June estimate of 1.241 million.

The drop surprised economists, who had expected housing starts to edge up by 0.3 percent to a rate of 1.257 million from the 1.253 million originally reported for the previous month.

Meanwhile, the Commerce Department said building permits spiked by 8.4 percent to a rate of 1.336 million in July from a revised 1.232 million in June.

Building permits, an indicator of future housing demand, had been expected to jump by 4.1 percent to 1.270 million from the 1.220 million originally reported for the previous month.

Oil service stocks showed a strong move to the upside after falling sharply over the past two weeks, driving the Philadelphia Oil Service Index up by 4 percent. The index bounced off its lowest closing level in eighteen years. The rebound by oil service stocks came amid an increase by the price of crude oil.

Considerable strength was also visible among semiconductor stocks, as reflected by the 2.8 percent jump by the Philadelphia Semiconductor Index.

Graphics chipmaker Nvidia (NVDA) led the sector higher after reporting second quarter results that exceeded analyst estimates on both the top and bottom lines.

Bargain hunting also contributed to significant strength among banking stocks, resulting in a 2.5 percent spike by the KBW Bank Index.

Natural gas, computer hardware, biotechnology, and transportation stocks also moved notably higher, while gold stocks were among the few groups to buck the uptrend.

Commodity, Currency Markets

Crude oil futures are rising $0.38 to $55.25 a barrel after climbing $0.40 to $54.87 a barrel last Friday. Meanwhile, an ounce of gold is trading at $1,508.10, down $15.50 from the previous session’s close of $1,523.60. On Friday, gold slid $7.60.

On the currency front, the U.S. dollar is trading at 106.64 yen compared to the 106.38 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is valued at $1.1100 compared to last Friday’s $1.1090.

Asia

Asian stocks rallied on Monday as investors cheered new fiscal measures being taken by major economies such as China and Germany to counter a possible recession.

A rebound in U.S. Treasury yields and media reports suggesting Washington and Beijing are actively working to revive negotiations aimed at ending the trade war also buoyed sentiment ahead of a major speech by the U.S. Federal Reserve chief later this week.

China's Shanghai Composite Index soared 59.27 points, or 2.1 percent, to 2,883.10 after the People's Bank of China said it would use market-based reform methods to help lower real lending rates and prop up a slowing economy.

Investors also welcomed U.S. President Donald Trump's comments that he had discussed the impact of Washington's tariffs on Chinese goods with Apple chief Tim Cook. Hong Kong's Hang Seng Index gained 557.62 points, or 2.2 percent, to finish at 26,291.84.

Japanese shares followed Wall Street higher, with the Nikkei 225 Index ending up 144.35 points, or 0.7 percent, at 20,563.16. The broader Topix closed 0.6 percent higher at 1,494.33.

A weaker yen buoyed exporters, with Toyota Motor and Sony climbing more than 1 percent each. Market heavyweight SoftBank advanced 1.7 percent, Fast Retailing added 0.8 percent and Fanuc rose half a percent.

In economic news, Japan posted a merchandise trade deficit of 249.6 billion yen in July, the Ministry of Finance said. That missed expectations for a shortfall of 194.5 billion yen following the 589.5 billion yen deficit in June. Exports were down 1.6 percent year-on-year, topping forecasts for a decline of 2.3 percent.

Australian markets rose sharply, with financials and energy companies leading the surge. The benchmark S&P/ASX 200 Index jumped 61.90 points, or 1 percent, to 6,467.40, while the broader All Ordinaries Index ended up 64.60 points, or 1 percent, at 6,550.50.

Westpac Banking Corp. gained 0.8 percent despite the bank saying it is seeing more missed mortgage payments amid a sluggish economy and a soft housing market. The other three big banks rose between 0.7 percent and 1.6 percent.

Beach Energy spiked 10.8 percent as it upgraded its five-year production outlook and its guidance on cash flow. Woodside Petroleum, Santos, Origin Energy and Oil Search rallied 2-3 percent on higher oil prices.

Business administration provider Smartgroup Corp. jumped 21.7 percent on solid half-year results and a brokerage upgrade.

Miners BHP, Fortescue Metals Group and Rio Tinto ended flat to slightly higher as iron ore and steel futures rebounded on news of stimulus in China and Europe.

Lendlease Group gained nearly 11 percent after the construction firm said it would sell its engineering and services unit.

Meanwhile, gold miners Evolution and Newcrest fell around 3 percent as the precious metal dipped on a firmer dollar.

Steel producer BlueScope Steel also slumped 8.4 percent after reporting a 35 percent decrease in its full-year profit.

Seoul stocks closed higher on hopes of more stimulus from central banks and amid news the U.S. and China are seeking to revive trade talks. The benchmark Kospi climbed by 12.73 points, or 0.7 percent, to 1,939.90.

Trump's chief economic advisor Larry Kudlow said on Fox News Sunday that if teleconferences between both sides' deputies pan out in the next 10 days, the U.S. and China can have a substantive renewal of negotiations.

Earlier, Trump said on Saturday that China wants to settle trade issues with America as it is experiencing the "worst year" in decades, but he reiterated that he was not ready for a deal.

Europe

European stocks have moved sharply higher on Monday on improved risk appetite, as U.S. Treasury yields bounce back and investors cheer reports of Chinese interest rate reforms as well as German fiscal stimulus to counter a possible recession.

Investors are also looking ahead to Federal Reserve Chairman Jerome Powell's speech later this week for his commentary on interest rates.

While the U.K.’s FTSE 100 Index has jumped by 1.2 percent, the French CAC 40 Index and the German DAX Index are both up by 1.4 percent.

Deutsche Bank's shares have rallied after a Spiegel report said that some major investors want supervisory board chairman Paul Achleitner to step down before his term ends in 2022.

Rival Commerzbank has also jumped as longer-term bond yields in the euro zone came off their record low levels. French banks BNP Paribas and Societe Generale have also risen.

Novartis has also moved to the upside on reports the Swiss drug maker is planning to give details on data manipulation related to its gene therapy Zolgensma.

Safestore Holdings has also rallied. The self-storage group is forming a joint venture with Carlyle European Real Estate Fund to acquire M3 Self Storage, a Dutch operator of six prime storage locations.

Sainsbury has also jumped after denying reports that it is speaking to internal candidates about replacing its current chief executive Mike Coupe.

In economic news, Eurozone inflation eased more than initially estimated in July to the lowest since late 2016, final data from Eurostat showed. Headline inflation slowed to 1 percent in July from 1.3 percent in June. The initial estimate was 1.1 percent.

Separately, figures from the European Central Bank revealed that the eurozone current account surplus decreased in June to its lowest level in nearly two- and-a-half years. The current account surplus fell to 18.352 billion euros from 30.291 billion euros in May.

U.S. Economic Reports

Following last week’s deluge of data, the economic calendar for this week is relatively light, although reports on new and existing home sales may attract attention in the coming days along with the minutes of the latest Federal Reserve meeting and a speech by Fed Chairman Jerome Powell.

Stocks In Focus

Shares of Estée Lauder (EL) are showing a significant move to the upside in pre-market trader after the beauty products company reported better than expected fiscal fourth quarter results and provided upbeat guidance.

Food service company Aramark (ARMK) is also likely to see initial strength on news activist investor Mantle Ridge has built a 20 percent stake in the company.

On the other hand, shares of PG&E (PCG) are moving sharply lower in pre-market trading as the bankrupt utility remains in control of its restructuring after a federal judge rejected a move by investors to put forward competing plans.
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