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Beyond the Numbers

Rising U.S.-China Tensions May Lead To Continued Weakness On Wall Street
7/24/2020 8:53 AM

The major U.S. index futures are currently pointing to a lower open on Friday, with stocks likely to extend the sell-off seen in afternoon trading on Thursday.

Concerns about rising tensions between the U.S. and China may weigh on Wall Street after Beijing decided to revoke the license for the establishment and operation of the U.S. Consulate General in Chengdu.

The move comes just days after the U.S. government ordered China to close its consulate in Houston, Texas, amid accusations Chinese diplomats aided in economic espionage and the attempted theft of scientific research.

A statement from China’s Foreign Ministry claimed the move by the U.S. violated international law and seriously damaged U.S.-China relations and called the closure of the U.S. consulate in Chengdu a “legitimate and necessary response to the unreasonable actions of the United States.”

“The current situation between China and the United States is something China does not want to see, and the responsibility rests entirely with the United States,” the statement said, urging the U.S. to immediately revoke the “erroneous decision.”

Worries about the continued spike in coronavirus cases may also generate some negative sentiment, with the U.S. reporting 68,663 new cases on Thursday, according to data compiled by Johns Hopkins University.

According to analysis by CNBC, daily new cases are rising, on average, by at least 5 percent in 25 states and the District of Columbia as of Thursday.

After showing a lack of direction early in the session, stocks moved sharply lower over the course of the trading day on Thursday. The major averages pulled back firmly into negative territory, with the tech-heavy Nasdaq showing a particularly steep drop.

The major averages moved roughly sideways going into the close, stuck in the red. The Dow tumbled 353.51 points or 1.3 percent to 26,652.33, the Nasdaq plunged 244.71 points or 2.3 percent to 10,461.42 and the S&P 500 slumped 40.36 points or 1.2 percent to 3,235.66.

A sharp decline by shares of Microsoft (MSFT) weighed on the markets, with the software giant tumbling by 4.4 percent.

Microsoft reported quarterly results that beat analyst estimates on both the top and bottom lines but said transactional license purchasing continued to slow and its LinkedIn unit was negatively impacted by the weak job market.

The weakness on Wall Street also came following the release of some disappointing U.S. economic data, including a Labor Department report showing first-time claims for U.S. unemployment benefits increased for the first time in sixteen weeks.

The report said initial jobless claims jumped to 1.416 million in the week ended July 18th, an increase of 109,000 from the previous week's revised level of 1.307 million.

Economists had expected jobless claims to come in unchanged compared to the 1.300 million originally reported for the previous month.

Jobless claims increased for the first time since late March but remain well below the record high of 6.867 million set in the week ended March 28th.

"The labor market remains in a precarious place as Covid-19 cases surge in some parts of the country and stricter measures are adopted in response," said Nancy Vanden Houten, Lead U.S. Economist at Oxford Economics.

She added, "Claims data from the last few weeks point to layoffs and less rehiring in possible signs of job losses in July payroll employment.

A separate report from the Conference Board showed its reading on leading U.S. economic indicators increased by less than expected in the month of June.

The Conference Board said its leading economic index jumped by 2.0 percent in June after soaring by an upwardly revised 3.2 percent in May and plunging by 6.3 percent in April.

Economists had expected the index to surge up by 2.5 percent in June compared to the 2.8 percent spike originally reported for the previous month.

Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board, noted labor market conditions and stock prices made particularly strong positive contributions.

"However, broader financial conditions and the consumers' outlook on business conditions still point to a weak economic outlook," Ozyildirim said.

He added, "Together with a resurgence of new COVID-19 cases across much of the nation, the LEI suggests that the U.S. economy will remain in recession territory in the near term."

Earlier in the day, the negative sentiment generated was partly offset by news that Senate Republicans and White House negotiators have reached a "fundamental agreement" on a $1 trillion coronavirus relief bill.

The news added to recent optimism about additional stimulus, although lawmakers still need to hash out the differences between the GOP proposal and the $3.4 trillion bill passed by the Democratic-controlled House.

With Microsoft leading the way lower, software stocks showed a substantial move to the downside over the course of the session. Reflecting the weakness in the sector, the Dow Jones U.S. Software Index plummeted by 3.3 percent.

Considerable weakness also emerged among retail stocks, as reflected by the 2.1 percent slump by the Dow Jones U.S. Retail Index.

Gold stocks also came under pressure as the day progressed, dragging the NYSE Arca Gold Bugs Index down by 2.1 percent. The index reached a seven-year intraday high before pulling back sharply. The downturn by gold stocks came despite a jump by the price of the precious metal.

Semiconductor, biotechnology and pharmaceutical stocks also saw notable weakness, while oil service stocks moved sharply higher even though the price of crude oil showed a notable drop on the day.

Commodity, Currency Markets

Crude oil futures are rising $0.24 to $41.31 a barrel after sliding $0.83 to $41.07 a barrel on Thursday. Meanwhile, after spiking $24.90 to $1,890 an ounce in the previous session, gold futures are climbing $3.40 to $1,893.40 an ounce.

On the currency front, the U.S. dollar is trading at 106.17 yen versus the 106.86 yen it fetched at the close of New York trading on Thursday. Against the euro, the dollar is valued at $1.1611 compared to yesterday’s $1.1596.

Asia

Asian stocks fell on Friday as disappointing U.S. employment data as well as concerns about rising U.S.-China tensions added to worries about the spread of the coronavirus.

Japanese markets were closed for the Sports Day holiday. Chinese shares led regional losses as tensions between the U.S. and China worsened.

Just days after the U.S. government ordered China to close its consulate in Houston, Texas, China announced the closure of the U.S. consulate in Chengdu, saying it was a “legitimate and necessary response to the unreasonable actions of the United States.”

The benchmark Shanghai Composite Index plummeted 128.34 points, or 3.9 percent, to 3,196.77, while Hong Kong's Hang Seng Index ended down 557.67 points, or 2.2 percent, at 24,705.33.

Australian markets also fell sharply, dragged down by tech stocks. The benchmark S&P/ASX 200 Index tumbled 70.50 points, or 1.2 percent, to 6,024 as Victoria State reported a mounting death toll from the coronavirus and Treasurer Josh Frydenberg said the federal budget deficit hit almost $86 billion last financial year. The broader All Ordinaries Index ended down 65.90 points, or 1.1 percent, at 6,148.

Heavyweight buy-now-pay-later firm Afterpay lost 3 percent. Gold miners snapped a five-day winning streak, with Northern Star Resources and Regis Resources falling over 2 percent. Evolution Mining slumped 7.8 percent.

The big four banks fell between 1.2 percent and 1.8 percent. Insurance company Insurance Australia Group plunged 7.8 percent after canceling its final dividend and slashing its earnings expectations for 2020. In the energy sector, Santos dropped 1.2 percent and Oil Search tumbled 3.4 percent.

Australia's private sector gathered momentum in July following the downturn caused by the coronavirus pandemic, flash data from IHS Markit showed today.

The flash Commonwealth Bank composite output index rose to 57.9 in July from 52.7 in June. Business activity grew at the fastest pace since April 2017, with the overall expansion driven by a sharp rise in services activity.

Seoul stocks extended losses for a third straight session as investors fretted about the economic fallout from the global Covid-19 health crisis. The benchmark Kospi slid 15.75 points, or 0.7 percent, to 2,200.44, a day after data showed the country slipped into a recession in the second quarter.

Europe

European stocks have tumbled on Friday as worries about rising Covid-19 cases and a sharp escalation in tensions between the United States and China overshadowed a slew of upbeat economic data from the region.

Just days after the U.S. government ordered China to close its consulate in Houston, Texas, China announced the closure of the U.S. consulate in Chengdu, saying it was a “legitimate and necessary response to the unreasonable actions of the United States.”

While the German DAX Index has tumbled by 1.6 percent, the French CAC 40 Index and the U.K.’s FTSE 100 Index are down by 1.2 percent and 1.1 percent, respectively.

Technology stocks have followed their U.S. peers lower, with SAP, Infineon Technologies and Dialog Semiconductor posting steep losses.

Dassault Aviation has also tumbled after its net income for the first half of 2020 dropped to 32.00 million euros from 253.7 million euros in the prior year.

Thales has declined as it set new financial guidance based on a stabilizing economy and health situation after taking into account continuing disruptions in the civil aeronautics market.

Vodafone shares have also moved sharply lower. After reporting a slight drop in first quarter revenue, the company said its mobile towers business will be spun-off via an initial public offer in Frankfurt early next year.

On the other hand, British Gas owner Centrica has soared after it announced a deal to sell its North American business Direct Energy to NRG Energy for $3.63 billion.

Signify NV, the world's biggest lighting maker, has also spiked after reporting a 62 percent increase in second quarter net profit.

In economic news, the euro area private sector grew at the fastest pace in just over two years in July due to the relaxation of the coronavirus containment measures, flash survey data from IHS Markit showed.

The composite output index rose to a 25-month high of 54.8 from 48.5 in June. This was above economists' forecast of 51.1.

The U.K. manufacturing and services purchasing managers' indexes both rose in July, according to initial 'flash' readings from IHS Markit.

A measure of U.K. consumer confidence remained unchanged at a lower level in July, final data from market research group GfK showed, with the corresponding index coming in at -27 in July, unchanged from flash estimate but above June's score of -30.

U.K. retail sales volume advanced 13.9 percent month-on-month in June, faster than the 12.3 percent rise in May and bigger than economists' forecast of 8 percent.

U.S. Economic Reports

The Commerce Department is scheduled to release its report on new home sales in the month of June at 10 am ET. Economists expect new home sales to jump 3.6 percent to an annual rate of 700,000.

Stocks In Focus

Shares of Intel (INTC) are moving sharply lower in pre-market trading after the semiconductor giant reported better than expected second quarter results but warned of further delays in production of its next-generation chips.

NRG Energy (NRG) is also likely to see initial weakness after agreeing to acquire Centrica’s North American subsidiary Direct Energy for $3.625 billion in an all-cash transaction.

Shares of American Express (AXP) may also move to the downside after the credit card company reported second quarter earnings that beat analyst estimates but weaker than expected revenues.

On the other hand, shares of Mattel (MAT) are seeing significant pre-market strength after the toy maker reported a narrower than expected second quarter loss on revenues that exceeded analyst estimates.
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