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Beyond the Numbers

Economic Worries May Weigh On Wall Street
3/21/2019 9:03 AM

The major U.S. index futures are pointing to a lower opening on Thursday following the mixed performances seen in the two previous sessions.

The downward momentum on Wall Street comes as traders continue to react to the Federal Reserve’s monetary policy announcement on Wednesday.

Traders initially reacted positively to the dovish tone of the Fed announcement, with the central bank indicating it no longer expects to raise interest rates this year.

Negative sentiment has crept in since then, however, as investors recognize the Fed’s downwardly revised interest rate forecast reflects expectations of slower economic growth.

In his post-meeting press conference, Fed Chairman Jerome Powell warned about the negative impact slowing economic growth in Europe and China will have on the U.S.

Stocks saw typical volatility following the announcement of the Fed’s latest monetary policy decision on Wednesday. The major averages showed wild swings before ending the day on opposite sides of the unchanged line.

While the Nasdaq inched up 5.02 points or 0.1 percent to a new five-month closing high of 7,728.97, the Dow dropped 141.71 points or 0.6 percent to 25,745.67 and the S&P 500 fell 8.34 points or 0.3 percent to 2,824.23.

The markets initially reacted positively after the Fed announced its widely expected decision to leave interest rates unchanged while also indicating the central bank no longer expects to raise rates this year.

The Fed decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent in support of its mandate of fostering maximum employment and price stability.

The central bank's forward projections also indicated interest rates are likely to remain unchanged for the remainder of the year.

The forecast for interest rates to be unchanged at the end of the current year compares to the December projections indicating two rate hikes.

The downward revision to the rate projections comes as the Fed noted data received since its January meeting points to a slowdown in economic growth from the solid rate seen in the fourth quarter of 2018.

The Fed reiterated that it would be patient as it determines future adjustments to interest rates to support a sustained economic expansion, strong labor market conditions, and inflation near 2 percent.

Kevin Doran, chief investment officer at AJ Bell, accused the Fed of kowtowing to the stock markets and President Donald Trump, who has been harshly critical of Powell and the central bank for raising rates.

"Despite protestations to the contrary, it seems evident that the Fed is kowtowing to stock market reaction to the prospect of higher interest rates and increasing levels of political interference," Doran said.

"It is all too obvious that nothing of significance is likely to happen on rates until such time that the asset price inflation being stoked by the current economic backdrop seeps its way into 'real world' inflation on the high streets," he added. "Maybe we should cut out the middle-man and leave Trump to announce rates on Twitter?"

Meanwhile, the Fed also confirmed that it intends to conclude the gradual reduction of its balance sheet by the end of September.

The Fed noted it plans to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.

The central bank also said its intends to continue to allow its holdings of agency debt and agency mortgage-backed securities to decline, consistent with the aim of holding primarily Treasury securities in the longer run.

Natural gas stocks moved sharply higher over the course of the trading session, driving the NYSE Arca Natural Gas Index up by 2.4 percent. The index ended the session at its best closing level in four months.

The rally by natural gas stocks came despite a decrease by the price of the commodity, as natural gas for April delivery fell $0.054 to $2.820 per million BTUs.

Substantial strength also emerged among gold stocks, which moved higher as the price of the precious metal rebounded in electronic trading. The NYSE Arca Gold Bugs Index surged up by 2.3 percent.

Oil producer and oil service stocks also saw considerable strength, as the price of crude oil for April delivery advanced following the release of a report unexpectedly showing a steep weekly drop in U.S. crude oil inventories.

On the other hand, financial stocks came under pressure on the heels of the Fed announcement, dragging the KBW Bank Index and the NYSE Arca Broker/Dealer Index down by 3 percent and 2 percent, respectively.

A notable drop by FedEx (FDX) also weighed on the transportation sector after the delivery giant reported weaker than expected fiscal third quarter results and cut its full-year profit forecast.

Commodity, Currency Markets

Crude oil futures are slipping $0.32 to $59.91 a barrel after climbing $0.80 to $59.83 a barrel a barrel on Wednesday. Meanwhile, an ounce of gold is trading at $1,318, up $16.30 compared to the previous session's close of $1,301.70. On Wednesday, gold fell $4.80.

On the currency front, the U.S. dollar is trading at 110.53 yen compared to the 110.70 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.1387 compared to yesterday’s $1.1413.

Asia

Asian stocks ended mostly higher on Thursday after the U.S. Federal Reserve turned more dovish than expected and indicated it no longer expects to raise rates this year. The Japanese markets were closed for the Vernal Equinox holiday.

However, the upside remained capped by Brexit-related uncertainty and renewed worries about U.S.-China trade talks.

U.S. President Donald Trump warned on Wednesday that Washington might maintain tariffs on Chinese goods for a "substantial period" to ensure Beijing's compliance with any trade deal.

Chinese shares ended higher and the yuan hit its highest level since July as the Fed abandoned projections for any interest rate hikes this year, citing signs of an economic slowdown.

The benchmark Shanghai Composite Index rose 10.81 points or 0.4 percent to 3,101.46, although Hong Kong's Hang Seng Index dropped 249.41 points or 0.9 percent to 29,071.56.

Australian markets finished little changed with a positive bias as global growth worries offset a boost from a dovish Federal Reserve. Banks ended on a mixed note after Morgan Stanley's earnings-recession call for the non-resource sectors.

Mining stocks rebounded from losses in the previous session, with BHP and Rio Tinto climbing more than 1 percent. Smaller rival Fortescue Metals Group jumped 2.4 percent.

Energy stocks finished flat to slightly higher, supported by a rise in oil prices as U.S. government data showed tightening domestic oil supplies.

Building materials supplier Boral lost 2.5 percent after Wagners Cement suspended its supply of cement products to the company for six months.

Education provider Navitas entered a trading halt pending an announcement related to its A$2.09 billion buyout offer by founder Rod Jones and private equity firm BGH.

In economic news, the unemployment rate in Australia came in at a seasonally adjusted 4.9 percent in February, beneath expectations for 5.0 percent, which would have been unchanged from January.

The economy added 4,600 jobs in February, shy of forecasts for the addition of 15,000 jobs following the increase of 38,300 jobs in the previous month.

Seoul stocks snapped a two-day losing streak as foreign investors lapped up large-cap tech shares, buoyed by the Fed's dovish stance. The benchmark Kospi rose 7.78 points or 0.4 percent to 2,184.88.

Samsung Electronics jumped 4.1 percent and SK Hynix soared 7.7 percent after U.S. memory-chip maker Micron Technology beat Wall Street's targets for its fiscal second quarter.

Samsung SDI rallied 4.8 percent and LG Chem advanced 5.2 percent on news they are focusing investment on EV batteries.

Europe

European stocks are trading mixed on Thursday as uncertainty surrounding Brexit and U.S. President Donald Trump's latest comments that U.S. tariffs on Chinese goods would remain in place "for a substantial period of time" has offset a boost from a dovish Federal Reserve.

While the U.K.’s FTSE 100 Index is up by 0.3 percent, the French CAC 40 Index is down by 0.6 percent and the German DAX Index is down by 1.1 percent.

The British pound held near a one-month low after U.K. Prime Minister Theresa May requested a three-month delay to Britain's departure from the European Union.

At an EU summit in Brussels today, she will try to persuade the other 27 countries to delay the U.K's exit beyond March 29.

Earlier in the day, the Swiss National Bank maintained its expansionary monetary policy, while the Norges bank raised interest rates and signaled there could be more policy tightening in the second half of this year.

In economic news, U.K. retail sales showed a surprise increase of 0.4 percent in February, beating forecasts.

Banks are losing ground on concerns that their margins would erode in a low-rate environment. British precision engineering group Renishaw has also slumped after a profit warning.

Elior Group has also moved sharply lower. The company said that any indication as to the result of its discussions with PAI Partners concerning a potential sale of its concession catering activities is premature.

On the other hand, Infineon Technologies and STMicroelectonics have risen after U.S. memory-chip maker Micron Technology beat Wall Street's targets for its fiscal second quarter.

Anglo American, Antofagasta and Glencore have also advanced as copper prices rose on the back of a weaker greenback.

U.S. Economic Reports

A report released by the Labor Department on Thursday showed first-time claims for U.S. unemployment benefits fell by more than expected in the week ended March 16th.

The report said initial jobless claims dropped to 221,000, a decrease of 9,000 from the previous week’s revised level of 230,000.

Economists had expected jobless claims to dip to 225,000 from the 229,000 originally reported for the previous week.

A separate report from the Philadelphia Federal Reserve showed regional manufacturing activity rebounded more than expected in March after an unexpected contraction in February.

The Philly Fed said its index for current manufacturing activity in the region jumped to a positive 13.7 in March from a negative 4.1 in February, with a positive reading indicating growth. Economists had expected the index to rise to a positive 4.5.

At 10 am ET, the Conference Board is scheduled to release its report on leading economic indicators in the month of February. The leading economic index is expected to inch up by 0.1 percent.

The Treasury Department is due to announce the details of next week’s auctions of two-year, five-year, and seven-year notes at 11 am ET.

Stocks In Focus

Shares of Biogen (BIIB) are moving sharply lower in pre-market trading after the biotech company decided to discontinue late-stage clinical trials of an experimental treatment for Alzheimer’s disease.

Clothing company Guess (GES) may also come under pressure after reporting weaker than expected fiscal fourth quarter earnings and providing disappointing guidance.

On the other hand, shares of Williams-Sonoma (WSM) are likely to see initial strength after the retailer reported fiscal fourth quarter results that exceeded estimates.

Chipmaker Micron (MU) may also move to the upside after reporting fiscal second quarter results that beat expectations on both the top and bottom lines.
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