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Beyond the Numbers

Lingering Trade War Worries May Weigh On Wall Street
9/3/2019 8:54 AM

The major U.S. index futures are currently pointing to a lower opening on Tuesday as traders return to their desks following the long holiday weekend.

Negative sentiment may be generated in reaction to new tariffs taking effect over the Labor Day weekend in the escalating U.S.-China trade.

The U.S. officially imposed a 15 percent tariff on approximately $112 billion worth of Chinese imports, leading to Chinese retaliatory tariffs on billions of dollars worth of U.S. goods.

President Donald Trump repeated his claim in remarks to reporters on Sunday that China is paying for the tariffs by devaluing their currency.

Trump indicated U.S. and Chinese officials still plan to meet for trade talks this month but argued the U.S. “can’t allow China to rip us off anymore as a country.”

After moving sharply higher over the course of trading last Wednesday and Thursday, stocks showed a lack of direction during trading last Friday. The major averages spent the day bouncing back and forth across the unchanged line before closing mixed.

The Dow edged up 41.03 points or 0.2 percent to 26,403.28, the best closing level for the blue chip index in nearly a month. The S&P 500 also crept up 1.88 points or 0.1 percent to 2,926.46, while the Nasdaq dipped 10.51 points or 0.1 percent to 7,962.88.

Even with the mixed performance on the day, the major averages all moved sharply higher for the week, The Dow surged up by 3 percent, while the S&P 500 and the Nasdaq jumped by 2.8 percent and 2.7 percent, respectively.

The choppy trading on the day came as traders expressed some uncertainty about whether the U.S. and China will resume trade talks and finally reach an elusive trade deal.

Trump has repeatedly claimed the Chinese are desperate to reach an agreement, arguing the U.S. tariffs on Chinese goods are doing significant damage to the world's second largest economy.

Meanwhile, China has signaled that they do not currently intend to retaliate against Trump's latest threat to raise the rate of tariffs on Chinese imports.

Chinese officials have expressed interest in negotiating an end to the escalating trade dispute but argued the U.S. has to create conditions for the two sides to resume talks on the basis of mutual respect.

A mixed batch of U.S. economic data also contributed to the lackluster performance on the day, as some traders looked to get a head start on the holiday weekend.

Before the start of trading, the Commerce Department released a report showing personal income crept up by less than expected in the month of July, although the report still showed a bigger than expected increase in personal spending during the month.

The Commerce Department said personal income inched up by 0.1 percent in July after climbing by an upwardly revised 0.5 percent in June.

Economists had expected personal income to rise by 0.3 percent compared to the 0.4 percent increase originally reported for the previous month.

Meanwhile, the report said personal spending grew by 0.6 percent in July after rising by an unrevised 0.3 percent in June. Personal spending had been expected to climb by 0.5 percent.

With spending rising by much more than income, personal saving as a percentage of disposable personal income slumped to 7.7 percent in July from 8.0 in June.

A separate report from the University of Michigan showed U.S. consumer sentiment deteriorated by even more than initially estimated in the month of August.

The report said the consumer sentiment index for August was downwardly revised to 89.8 from the preliminary reading of 92.1.

The revised reading is down sharply from the final July reading of 98.4, showing the biggest monthly drop since December of 2012.

Surveys of Consumers chief economist Richard Curtin noted the plunge in late 2012 reflected widespread fears of being pushed off the "fiscal cliff" due to then-impending increases in tax rates and decreases in government spending.

"The recent decline is due to negative references to tariffs, which were spontaneously mentioned by one-in-three consumers," Curtin said. "Unlike concerns about the fiscal cliff, which were promptly resolved, Trump's tariff policies have been subject to repeated reversals amid threats of higher future tariffs."

"Such tactics may have some merit in negotiations with China, but they act to increase uncertainty and diminish consumer spending at home," he added. "Unlike the repeated tariff reversals, negative trends in consumer sentiment cannot be easily reversed."

Meanwhile, Trump has denied the tariffs are having a negative impact on the economy, instead pointing the finger at the Federal Reserve and claiming companies blaming the tariffs are making excuses for bad management.

"We don't have a Tariff problem (we are reigning in bad and/or unfair players), we have a Fed problem. They don't have a clue!" Trump tweeted.

"If the Fed would cut, we would have one of the biggest Stock Market increases in a long time," he added. "Badly run and weak companies are smartly blaming these small Tariffs instead of themselves for bad management...and who can really blame them for doing that? Excuses!"

Computer hardware stocks saw considerable strength throughout the session, resulting in a 2.7 percent jump by the NYSE Arca Computer Hardware Index. The index ended the day at its best closing level in almost a month.

Dell Technologies (DELL) posted a standout gain after the computer maker reported second quarter results that exceeded expectations.

Notable strength also remained visible among steel stocks, as reflected by the 1.2 percent gain posted by the NYSE Arca Steel Index. With the advance, the index climbed further off the nearly three-year closing low set on Tuesday.

On the other hand, natural gas stocks pulled back sharply, dragging the NYSE Arca Natural Gas Index down by 1.9 percent following the 2.6 percent spike on Thursday.

Tobacco stocks also showed a significant move to the downside, resulting in a 1.2 percent drop by the NYSE Arca Tobacco Index.

Commodity, Currency Markets

Crude oil futures are tumbling $1.26 to $53.84 a barrel after plunging $1.61 to $55.10 a barrel last Friday. Meanwhile, an ounce of gold is trading at $1,541.20, up $11.80 from the previous session’s close of $1,529.40. On Friday, gold slid $7.50.

On the currency front, the U.S. dollar is unchanged compared to the 106.24 yen it fetched on Monday. Against the euro, the dollar is valued at $1.0941 compared to yesterday’s $1.0969.

Asia

Asian stocks ended mixed on Tuesday as the prospect of more Brexit-related market turmoil as well as uncertainty surrounding trade talks between the U.S. and China kept investors on the sidelines.

After a new round of retaliatory tariffs by the world's two largest economies took effect over the weekend, investors waited to see if Chinese and American officials would begin the next round of trade talks this month to resolve the trade war.

On the Brexit front, former British chancellor Philip Hammond said he believes rebel Conservative members of parliament have the numbers to defeat Prime Minister Boris Johnson's government in a crucial vote.

Chinese shares ended higher, with tech stocks pacing the gainers as investors cheered Beijing's continued push for tech independence amid the bruising trade war with the United States.

The benchmark Shanghai Composite Index rose 6.05 points, or 0.2 percent, to 2,930.15, while Hong Kong's Hang Seng Index ended down 98.70 points, or 0.4 percent, at 25,527.85.

Japanese shares ended marginally higher as a weaker yen helped lift exporters. The Nikkei 225 Index inched up 4.97 points to finish at 20,625.16, while the broader Topix ended up by 5.58 points at 1,510.79.

Exporters Panasonic, Sony, Toyota Motor, Honda Motor and Nissan Motor rose between 0.6 percent and 1.3 percent as the yen edged further away from an eight-month high hit last week. Subaru shares jumped 2.4 percent.

Sumitomo Metal Mining Co. advanced 1.8 percent as the price of nickel soared to a five-year high on supply concerns. Real estate group Cosmos Initia Co. soared 7.5 percent following the recent drop in bond yields.

Australian markets fluctuated before finishing on a flat note as the Reserve Bank of Australia kept the cash rate on hold at a record low and reiterated rates can be cut “if needed.”

Both the S&P/ASX 200 and the All Ordinaries Index ended the session marginally lower at 6,573.40 and 6,673.50, respectively.

The big four banks ended narrowly mixed, while mining heavyweights BHP and Rio Tinto ended down 0.4 percent and 0.8 percent, respectively. Total's partner Oil Search rallied 2.1 percent ahead of Papua New Guinea's decision on a gas deal.

In economic news, Australia's current account registered its first surplus in 44 years in the second quarter, while retail sales declined for the first time in three months in July, separate reports showed.

South Korea's Kospi average slipped 3.50 points, or 0.2 percent, to 1,965.69 as investors digested inflation and GDP data.

Annual inflation dipped to a record low in August and the Bank of Korea revised down the economic growth for the April-June period to 1.0 percent sequentially from a 1.1 percent gain reported earlier, strengthening the case for another central bank rate cut as early as next month.

Europe

European stocks have moved moderately lower for the first time in four sessions on Tuesday as the British Prime Minister faces a showdown in Parliament over Brexit and investors wait for more clarity on the U.S.-China trade talks.

British PM Boris Johnson will call a general election for October 14th if he loses a Commons vote later today aimed at blocking a no-deal Brexit.

Investors are also looking ahead to the European Central Bank's meeting next week, where the ECB is widely expected to cut interest rates to bolster growth.

While the French CAC 40 Index has slid by 0.4 percent, the German DAX Index and the U.K.’s FTSE 100 Index are both down by 0.2 percent.

Shares of Thyssenkrupp have tumbled on news the German industrial company will be moved from the DAX to the smaller MDAX Index on Wednesday.

Ryanair has also moved to the downside despite the airline reporting an 8 percent jump in group traffic for the month of August.

Restaurant Group gas also plunged as it posted a loss for the first six months of 2019 after the unpopular Wagamama purchase.

Meanwhile, Ferguson, a specialist distributor of plumbing and heating products, has jumped after announcing its intention to demerge its U.K. operations.

U.S. Economic Reports

At 10 am ET, the Institute for Supply Management is scheduled to release its report on manufacturing activity in the month of August.

The ISM’s purchasing managers index is expected to edge down to 51.0 in August after slipping to 51.2 in July, although a reading above 50 would still indicate growth in the manufacturing sector.

The Commerce Department is also due to release its report on construction spending in the month of July at 10 am ET. Construction spending is expected to rise by 0.3 percent in July after plunging by 1.3 percent in June.

At 5 pm ET, Boston Federal Reserve President Eric Rosengren is scheduled to speak about the U.S. economy at Stonehill College in Easton, Massachusetts.

Stocks In Focus

Shares of Conn’s (CONN) are soaring in pre-market trading after the home appliance and electronics retailer reported fiscal second quarter results that beat analyst estimates on both the top and bottom lines.

Snapchat parent Snap (SNAP) may also move to the upside after Evercore upgraded its rating on the company’s stock to Outperform from In-Line.

On the other hand, shares of Boeing (BA) may see initial weakness after a report from the Wall Street Journal said friction between the aerospace giant and international air-safety authorities threatens a new delay in bringing the grounded 737 MAX fleet back into service.
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