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Beyond the Numbers

Uncertainty About Trade Deal May Lead To Pullback On Wall Street
10/14/2019 8:51 AM

The major U.S. index futures are currently pointing to a lower opening on Monday, with stocks likely to give back ground following the rally seen over the three previous sessions.

Profit taking may contribute to initial weakness on Wall Street, as traders cash in on the recent gains amid renewed uncertainty about a trade deal with China.

President Donald Trump announced on Friday that the U.S. and China have reached a “very substantial phase one deal,” although reports this morning suggest China wants another round of talks before signing the agreement.

A person familiar with the matter told Bloomberg News that China may send a delegation led by Vice Premier Liu He to finalize a written deal that could be signed at the Asia-Pacific Economic Cooperation summit next month in Chile.

Another person told Bloomberg China wants Trump to also scrap a planned tariff hike in December in addition to the hike scheduled for this week.

Overall trading activity may be somewhat subdued, however, as the Columbus Day holiday may keep some traders away from their desks.

Stocks moved sharply higher over the course of the trading session on Friday, extending the strong upward move seen over the two previous sessions. With the rally over the past few sessions, the major averages more than offset the steep drop seen on Monday and Tuesday.

The major averages pulled back off their best levels going into the close but remained firmly positive. The Dow jumped 319.92 points or 1.2 percent to 26,816.59, the Nasdaq spiked 106.26 points or 1.3 percent to 8,057.04 and the S&P 500 surged up 32.14 points or 1.1 percent to 2,970.27.

For the week, the Dow and the Nasdaq both advanced by 0.9 percent, while the S&P 500 climbed by 0.6 percent.

The rally on Wall Street came as traders expressed continued optimism about U.S.-China trade talks, with Trump announcing late in the trading day that the two economic superpowers have reached a "very substantial phase one deal."

Trump said the deal includes up to $40 to $50 billion in Chinese purchases of U.S. agricultural products as well as Chinese concessions on intellectual property and financial services.

In exchange for the concessions by China, the U.S. has agreed to hold off on an increase in tariffs originally scheduled for next week.

Trump said the agreement would take about three weeks to write and would likely be signed by both sides by the Asia-Pacific Economic Cooperation summit in Chile in November.

"Phase two will start almost immediately" after the first phase is signed, Trump said in an Oval Office meeting with China's lead negotiator, Vice Premier Liu He.

Stocks spiked early in the session as Trump made upbeat comments about the negotiations on Twitter, tweeting, "Good things are happening at China Trade Talk Meeting. Warmer feelings than in recent past, more like the Old Days."

Trump noted in a subsequent tweet that a potential trade deal with China would not have to go through the "very long and politically complex Congressional Approval Process."

Oil service stocks moved sharply higher over the course of the trading session, driving the Philadelphia Oil Service Index up by 4.7 percent. The rally by oil service stocks came amid a jump by the price of crude oil.

Optimism about a U.S.-China trade deal also contributed to significant strength among steel stocks, as reflected by the 3.9 percent spike by the NYSE Arca Steel Index.

Semiconductor, transportation, chemical, and financial stocks also saw considerable strength on the day, reflecting broad based buying interest.

Meanwhile, gold stocks were among the few groups that bucked the uptrend, with the NYSE Arca Gold Bugs Index plunging by 4.6 percent. The sell-off by gold stocks came amid a steep drop by the price of the precious metal.

Commodity, Currency Markets

Crude oil futures are tumbling $1.11 to $53.59 a barrel after jumping $1.15 to $54.70 a barrel last Friday. Meanwhile, an ounce of gold is trading at $1,496.60, up $7.790 from the previous session’s close of $1,488.70. On Friday, gold tumbled $12.20.

On the currency front, the U.S. dollar is trading at 108.25 yen compared to the 108.29 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is valued at $1.1025 compared to last Friday’s $1.1042.

Asia

Asian stocks rose on Monday after the U.S. and China reached a "phase one" trade deal last week and the U.S. agreed to hold off on tariff hikes planned for this week, providing a temporary reprieve for global markets.

As trade uncertainty weighs on economic activity, investors also remain hopeful that the Federal Reserve will cut interest rates later this month. Japanese markets were closed for a holiday.

Chinese shares rallied as signs of improvement in trade relations between the U.S. and China helped investors shrug off concerns about the country's economic health.

The benchmark Shanghai Composite Index jumped 34.23 points, or 1.2 percent, to 3,007.88, while Hong Kong's Hang Seng Index ended the session up 213.41 points, or 0.8 percent, at 26,521.85.

Official data showed Chinese exports declined more than expected in September, reflecting weak global growth and the trade dispute with the U.S.

In dollar terms, exports fell 3.2 percent year-on-year, the General Administration of Customs said. This was bigger than the expected 3 percent decrease and the prior month's 1 percent fall.

At the same time, imports decreased 8.5 percent annually versus the expected decline of 6 percent. As a result, the trade surplus increased to $39.65 billion from $34.83 billion a month ago.

Australian markets advanced for a third straight session, with banks and miners leading the surge amid signs of progress on trade negotiations between the U.S. and China.

The benchmark S&P/ASX 200 Index climbed 35.80 points, or 0.5 percent, to 6,642.60, while the broader All Ordinaries Index ended up 36 points, or 0.5 percent, at 6,757.90.

Mining heavyweights BHP and Rio Tinto jumped around 2 percent, while smaller rival Fortescue Metals Group advanced 1.6 percent.

Energy stocks gained ground after oil prices jumped sharply last Friday amid renewed geopolitical tensions following reports of an attack on an Iranian oil tanker.

Santos soared 5.7 percent after the company said it would buy ConocoPhillips' northern Australia business for up to $1.44 billion. Woodside Petroleum gained 2.5 percent, Origin Energy rallied 1.8 percent and Oil Search climbed 2.5 percent.

The big four banks, which are facing a probe by the competition regulator into mortgage pricing, rose between 0.4 percent and 0.7 percent.

Seoul stocks posted strong gains after Samsung Electronics reported better than expected third quarter earnings last week. The Kospi jumped 22.79 points, or 1.1 percent, to 2,067.40. Samsung shares gained 1.7 percent and SK Hynix added 0.6 percent.

Europe

European stocks have fallen on Monday as renewed uncertainty around the timing and nature of Brexit as well as weak data from China have prompted traders to book some profits after a three-day rally.

Britain and the European Union said over the weekend that a lot more work would be needed to secure a Brexit agreement.

Chinese import and export figures for September both came in worse than expected, adding to concerns about slowing economic growth.

While the U.K.’s FTSE 100 Index has fallen by 0.4 percent, the German DAX Index and the French CAC 40 Index are down by 0.6 percent and 0.7 percent, respectively.

Swiss pharmaceutical companies Roche Holding and Novartis have moved notably lower following a report the United States is considering tariffs on Swiss pharmaceutical products.

Banks Commerzbank, Credit Agricole and BNP Paribas have also fallen as euro zone bond yields pull back from last week's 2 1/2- month highs. Tariff-sensitive automakers are also declining.

On the other hand, Sophos Group has jumped after Private equity firm Thoma Bravo announced it would take the British cybersecurity company private in a deal valuing the company at about $3.8 billion.

In economic news, Eurozone industrial production expanded in August after easing for two straight months, data from Eurostat showed.

Industrial output grew 0.4 percent month-on-month, offsetting a 0.4 percent drop in July. This was the first rise in three months. Production was forecast to climb 0.3 percent.

U.S. Economic Reports

No major U.S. economic data is scheduled to be released today due to the Columbus Day holiday, although reports on retail sales, housing starts and industrial production are likely to attract attention in the coming days.

Stocks In Focus

Shares of AECOM (ACM) are moving sharply higher in pre-market trading after the engineering and design company announced a deal to sell its management services businesses to a consortium of private-equity firms for $2.4 billion.

Fitness center operator Planet Fitness (PLNT) may also see initial strength after Imperial Capital upgraded its rating on the company’s stock to Outperform from In-Line.

On the other hand, shares of Toll Brothers (TOL) may move to the downside after Susquehanna Financial downgraded its rating on the homebuilder’s stock to Neutral from Positive.
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