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Beyond the Numbers

Waning Optimism About Trade Talks May Generate Selling Pressure
10/8/2019 9:00 AM

The major U.S. index futures are pointing to a lower opening on Tuesday, with stocks likely to see further downside after ending Monday’s choppy trading session modestly lower.

Waning optimism about upcoming U.S.-China trade talks may generate early selling pressure after a report from the South China Morning Post said China is subtly toning down expectations ahead of this week’s high-level negotiations.

The SCMP said Chinese Vice Premier Liu He is leading China’s delegation to Washington but will not carry the title of “special envoy” for President Xi Jinping, an early indication that Liu has not been given any particular instructions from China’s leader.

A source briefed on preparations for the trade talks also told the SCMP that the Chinese delegation may cut short their stay in Washington.

News that the U.S. has expanded its trade blacklist to include some of China’s top artificial intelligence firms may also cast a shadow over the talks along with a Bloomberg report the White House is discussing blocking government pension funds from investing in China.

The negative sentiment may be partly offset by a Labor Department report showing an unexpected decrease in U.S. producer prices in the month of September.

The tame inflation data may clear the way for the Federal Reserve to continue cutting interest rates amid signs of slowing economic growth.

Stocks showed a lack of direction over the course of the trading session on Monday, with the major averages bouncing back and forth across the unchanged line following the rally seen last Friday.

The major averages eventually ended the day in negative territory. The Dow fell 95.70 points or 0.4 percent to 26,478.02, the Nasdaq dipped 26.18 points or 0.3 percent to 7,956.29 and the S&P 500 slid 13.22 points or 0.5 percent to 2,938.79.

The choppy trading on Wall Street came as traders seemed reluctant to make significant moves ahead of the next round of high-level trade talks in Washington later this week.

Ahead of the talks, scheduled to begin on Thursday, a report from Bloomberg News said Chinese officials are signaling they're increasingly reluctant to agree to the broad trade deal being pursued by President Donald Trump.

Citing people familiar with the discussions, Bloomberg said senior Chinese officials have indicated the range of topics they're willing to discuss has narrowed considerably.

An offer from Chinese Vice Premier Liu He would purportedly not include reforming Chinese industrial policy or government subsidies.

The upcoming negotiations come as the trade war continues to hang over the economy, with a survey by the National Association for Business Economics showing 53 percent of economists see trade policy as the key downside risk to the economy.

The NABE said four out of five panelists believe that risks to the economic outlook are weighted to the downside, an increase from the 60 percent who held this view in June.

"The panel turned decidedly more pessimistic about the outlook over the summer, with 80% of participants viewing risks to the outlook as tilted to the downside," said Survey Chair Gregory Daco, chief U.S. economist at Oxford Economics.

He added, "The rise in protectionism, pervasive trade policy uncertainty, and slower global growth are considered key downside risks to U.S. economic activity."

Most of the major sectors showed only modest moves on the day, contributing to the lackluster performance by the broader markets.

Natural gas stocks showed a significant move to the downside, however, with the NYSE Arca Natural Gas Index sliding by 1.3 percent.

The weakness among natural gas stocks came amid a decrease by the price of the commodity, as natural gas for November delivery fell $0.049 to $2.303 per million BTUs.

Steel, oil service and gold stocks also saw notable weakness on the day, while modest strength was visible among telecom stocks.

Commodity, Currency Markets

Crude oil futures are sliding $0.70 to $52.05 a barrel after edging down $0.06 to $52.75 a barrel on Monday. Meanwhile, after falling $8.50 to $1,504.40 an ounce in the previous session, gold futures are rising $5.30 to $1,509.70 an ounce.

On the currency front, the U.S. dollar is trading at 106.93 yen compared to the 107.26 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.0988 compared to yesterday’s $1.0971.

Asia

Asian stocks rose on Tuesday after White House economic adviser Larry Kudlow said he is hopeful about trade talks with China, saying that the delegates are starting with a "clean slate, reopening the door."

"And as you know, Thursday and Friday, the principals' levels will be meeting and we are waiting for the Chinese offer. We are open, open to almost anything right now,” Kudlow said.

Chinese Vice Premier Liu He is scheduled to meet U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin in Washington.

Chinese stocks rose as a dim services sector survey reinforced hopes that Beijing will expand stimulus to boost growth.

The benchmark Shanghai Composite Index rose 8.38 points, or 0.3 percent, to 2,913.57 as traders returned to their desks after a week-long holiday. Hong Kong's Hang Seng Index edged up 72.37 points, or 0.3 percent, to 25,893.40.

China's private sector expanded at the fastest pace in five months in September, survey data from IHS Markit showed.

The Caixin composite output index rose to 51.9 from 51.6 in August. The latest expansion was the strongest rate since April.

The services PMI fell to a seven-month low of 51.3 from 52.1 in the previous month. The reading was expected to fall marginally to 52.0.

Tokyo stocks rebounded, with chipmakers surging after South Korean tech giant Samsung Electronics posted better than expected earnings. The yen's retreat against the U.S. dollar also gave exporters a lift.

The Nikkei 225 Index rallied 212.53 points, or 1 percent, to 21,587.78, while the broader Topix closed 0.9 percent higher at 1,586.50.

Tokyo Electron rose 1.4 percent, Screen Holdings advanced 3.7 percent, Sumco jumped 3.8 percent and Advantest soared 4.4 percent.

On the economic front, a government report showed that Japan had a current account surplus of 2,157.7 billion yen in August, up 18.3 percent year-on-year. That beat expectations for a surplus of 2,100 billion yen and was up from the 1,999.9 billion yen surplus in July.

The trade balance showed a surplus of 50.9 billion yen, beating forecasts for 36.4 billion yen following the 74.5 billion yen deficit in the previous month.

Another report revealed that average household spending in Japan was up an annual 1.0 percent in August, matching expectations.

Australian markets closed higher for the third straight day as miners and energy stocks gained ground ahead of another round of U.S.-China trade talks.

The benchmark S&P/ASX 200 Index rose 29.80 points, or 0.5 percent, to 6,593.40, while the broader All Ordinaries Index ended up 27 points, or 0.4 percent, at 6,713.70.

Oil and gas producer Santos rallied 2 percent after announcing a strong oil flow at a field in Western Australia.

Mining heavyweights BHP and Rio Tinto gained 0.7 percent and 1.1 percent, respectively, as copper prices firmed up.

Gold miners Evolution and Newcrest ended on a subdued note as gold prices declined on optimism over the U.S.-China negotiations.

ANZ Banking rose 0.4 percent. The lender has announced another A$559 million in second-half provisions for customer remediation and set aside A$1.10 billion of post-tax remediation provisions over the last two years.

Ansell advanced 0.9 percent. The protective glove manufacturer said it would seek shareholder approval at its annual general meeting on November 14 for the on-market buyback of 26.4 million shares.

Seoul stocks rallied, with tech and auto stocks pacing the gainers after Samsung Electronics delivered better than anticipated third-quarter earnings, helped by a recovery in the mobile device and display sectors.

The benchmark Kospi jumped 24.52 points, or 1.2 percent, to 2,046.25, while Samsung shares spiked 2.4 percent.

Europe

European stocks have moved lower on Tuesday as investors brace for the next round of high-level trade talks between the U.S. and China starting Thursday.

Traders are also digesting comments from a source in British Prime Minister Boris Johnson's office suggesting that a Brexit deal was essentially impossible.

The day's economic data proved to be a mixed bag, with China's services sector growing at its slowest pace in seven months in September, while a surprise rebound in German industrial production in August suggested that the biggest euro area economy may avoid recession.

The pound is moving lower after official data showed that U.K. labor productivity contracted in the second quarter at the fastest pace in five years.

While the U.K.’s FTSE 100 Index has fallen by 0.4 percent, the French CAC 40 Index and the German DAX Index are down by 1 percent and 1.1 percent, respectively.

Shares of London Stock Exchange Group have slumped after Hong Kong's bourse abandoned its bid for the company.

easyJet has fallen sharply despite the airline delivering a solid performance in the fourth quarter and predicting it will hit upper profit guidance of up to £430 million for its full year.

Recruiter PageGroup has also plunged after downgrading its profit outlook. Swiss-Irish food group Aryzta has also tumbled as it reported a drop in organic revenue in North America in the past 12 months.

On the other hand, AMG Advanced Metallurgical Group N.V. has advanced after it agreed to form a joint venture with Shell Catalysts & Technologies to provide a sustainable solution for catalyst reclamation and recycling.

U.S. Economic Reports

Producer prices in the U.S. unexpectedly decreased in the month of September, according to a report released by the Labor Department.

The Labor Department said its producer price index for final demand fell by 0.3 percent in September after inching up by 0.1 percent in August. The drop surprised economists, who had expected another 0.1 percent uptick.

Excluding food and energy prices, core producer prices also slid by 0.3 percent in September after climbing by 0.3 percent in August. Economists had expected core prices to rise by 0.2 percent.

At 1 pm ET, the Treasury Department is scheduled to announce the results of this month’s auction of $38 billion worth of three-year notes.

Chicago Federal Reserve President Charles Evans is due to speak at a Chicago Rotary Club Luncheon in Chicago, Illinois, at 1:35 pm ET.

At 1:50 pm ET, Fed Chairman Jerome Powell is scheduled to speak at the 61st National Association of Business Economics Annual Meeting in Denver, Colorado.

Minneapolis Fed President Neel Kashkari is slated to speak at a town hall at St. Cloud State University in St. Cloud, Minnesota, at 5 pm ET.

Stocks In Focus

Shares of Domino’s Pizza (DPZ) are moving significantly lower in pre-market trading after the pizza chain reported weaker than expected fiscal third quarter results.

Chipmaker Ambarella (AMBA) is also seeing substantial pre-market weakness after one of its Chinese customers was blacklisted by the U.S. government.

On the other hand, shares of Helen of Troy (HELE) are likely to see initial strength after the personal care products maker reported fiscal second quarter results that beat estimates and raised its full-year guidance.
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