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Beyond the Numbers

Rate Cut Optimism May Generate Continued Buying Interest
6/18/2019 9:05 AM

The major U.S. index futures are pointing to a higher opening on Tuesday, with stocks likely to add to the modest gains posted in the previous session.

Stocks may continue to benefit from optimism that the Fed will strike a dovish tone in its statement announcing its latest monetary policy decision on Wednesday.

The Fed is widely expected to leave interest rates unchanged but could signal plans to cut rates as soon as its next meeting at the end of July.

Optimism about a potential rate cut has helped to prop up the markets ever since Fed Chairman Jerome Powell pledged to act “as appropriate” to support the U.S. economic expansion.

President Donald Trump has been urging the Fed to lower rates and may ramp up pressure on the central bank after European Central Bank President Mario Draghi suggested he could provide additional stimulus.

Noting the subsequent drop in the value of the euro against the U.S. dollar, Trump called Draghi’s comments “unfair” to the U.S., adding, “They have been getting away with this for years, along with China and others.”

Buying interest was somewhat subdued, although stocks still managed to end Monday's trading mostly higher. The tech-heavy Nasdaq outperformed its counterparts after underperforming last Friday.

The major averages gave back ground going into the close but remained in positive territory. While the Nasdaq climbed 48.37 points or 0.7 percent to 7,845.02, the Dow edged up 22.92 points or 0.1 percent to 26,112.53 and the S&P 500 inched up 2.69 points or 0.1 percent to 2,889.67.

The strength on Wall Street partly reflected optimism the Fed will signal a near-term interest rate cut when announcing its monetary policy decision on Wednesday.

Most economists expect the Fed to leave interest rates unchanged but make changes to its accompanying statement pointing to an openness to cutting rates in the near future.

Recent indications the U.S.-China trade dispute is contributing to a slowdown in U.S. economic growth has led to speculation the Fed may cut rates.

Disappointing economic data seems to have reinforced the optimism about a potential rate cut, as the New York Fed released a report before the start of trading showing a sharp downward turn in regional manufacturing activity in June.

The New York Fed said its general business conditions index plunged to a negative 8.6 in June from a positive 17.8 in May, with a negative reading indicating a contraction in manufacturing activity. Economists had expected the index to drop to a positive 10.0.

With the much record-setting monthly decrease, the general business conditions index recorded its first negative reading in over two years.

A separate report from the National Association of Home Builders showed an unexpected pullback in homebuilder confidence in the month of June.

The report said the NAHB/Wells Fargo Housing Market Index dropped to 64 in June after jumping to 66 in May. The decrease surprised economists, who had expected the index to inch up to 67.

"While demand for single-family homes remains sound, builders continue to report rising development and construction costs, with some additional concerns over trade issues," said NAHB Chairman Greg Ugalde.

Biotechnology stocks showed a substantial move to the upside on the day, driving the NYSE Arca Biotechnology Index up by 2.8 percent to its best closing level in over a month.

Within the biotech sector, shares of Array BioPharma (ARRY) spiked by 56.9 percent after the biopharmaceutical company agreed to be acquired by drug giant Pfizer (PFE) in a deal valued at $11.4 billion.

Considerable strength was also visible among oil service stocks, as reflected by the 2.3 percent jump by the Philadelphia Oil Service Index.

Oilfield services company C&J Energy (CJ) helped lead the sector higher after announcing a merger with rival Keane Group (FRAC).

Natural gas, gold, and commercial real estate stocks also saw notable strength on the day, while significant weakness emerged among banking and chemical stocks.

Commodity, Currency Markets

Crude oil futures are rising $0.19 to $52.12 barrel after sliding $0.58 to $51.93 a barrel on Monday. Meanwhile, after dipping $1.60 to $1,342.90 ounce in the previous session, gold futures are jumping $13.70 to $1,356.60 an ounce.

On the currency front, the U.S. dollar is trading at 108.25 yen compared to the 108.54 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.1198 compared to yesterday’s $1.1218.

Asia

Asian stocks ended mostly higher on Tuesday, although overall gains remained capped amid caution ahead of the U.S. Federal Reserve and Bank of Japan meetings this week.

The U.S. central bank is unlikely to cut rates at its two-day meeting, but the Fed's statement on Wednesday may offer fresh clues as to the timing of a possible interest rate cut later this year.

Markets have nearly priced in hopes for an eventual rate cut since the Fed Chairman made remarks on June 4 suggesting a lower rate.

Chinese shares ended little changed in thin trading. The benchmark Shanghai Composite Index inched up 2.54 points or 0.1 percent to 2,890.16. Hong Kong's Hang Seng Index showed a more substantial move to the upside, jumping by 271.61 points or 1 percent to 27,498.77.

Australian shares advanced after the minutes from the latest Reserve Bank of Australia Board meeting suggested that the central bank would likely cut rates further to drive increased hiring and boost household confidence.

Investors shrugged off a government report showing that Australia's house price index declined in the first quarter of 2019.

The benchmark S&P/ASX 200 Index climbed 39.10 points or 0.6 percent to 6,570.00, while the broader All Ordinaries Index ended up 38.50 points or 0.6 percent at 6,647.90.

Coles Group rallied 3.5 percent after the supermarket chain said it is targeting A$1 billion in cumulative savings over a four-year period. Woolworths Group rose 1 percent and Wesfarmers advanced 1.8 percent.

Tech stocks such as Xero and Appen rose 1-2 percent. Gold miner Evolution jumped 2.5 percent and Newcrest gained 1.1 percent as gold prices edged higher on dollar weakness.

Healthcare heavyweight CSL rallied 1.8 percent, Cochlear added 1.1 percent and Resmed advanced 1.3 percent.

Seoul stocks finished modestly higher after declines in the last four sessions. The benchmark Kospi rose 7.98 points or 0.4 percent to 2,098.71 on institutional buying. Tech and auto stocks led the surge, with Samsung Electronics and Kia Motors ending up more than 1 percent.

Meanwhile, Japanese shares hit a 1-1/2-week low in subdued trading as caution set in ahead of Fed and BoJ meetings. The Nikkei 225 Index dropped 151.29 points or 0.7 percent to 20,972.71, while the broader Topix closed 0.7 percent lower at 1,528.67.

A falling interest rate scenario pulled down insurers, with both Japan Post Insurance and T&D Holdings declining over 1 percent.

Market heavyweight SoftBank tumbled 3.3 percent after its Vision Fund led a $205 million investment in San Francisco-based health startup Collective Health.

Apartment management firm Tateru Inc plunged 18.6 percent on a Nikkei report that the land ministry plans to slap a business suspension order on the company over data manipulation.

On the other hand, Tsuruha Holdings, the parent company of Tsuruha Co., jumped 4 percent after releasing a positive trading update.

Europe

European stocks have rebounded after seeing early weakness on Tuesday as hopes for more central bank stimulus have outweighed another profit warning in the chip sector.

Sentiment was bolstered after European Central Bank President Mario Draghi said earlier today that the central bank still has room to cut interest rates and measures to cushion the side effect from low interest rates.

Speaking at the ECB Forum on Central Banking in Sintra, Portugal, Draghi said, "Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools," adding, "And the APP [asset purchase program] still has considerable headroom."

Focus now shifts to a two-day policy meeting of the U.S. Federal Reserve beginning today, with analysts expecting another dovish shift in U.S. monetary policy.

While the U.K.’s FTSE 100 Index has surged up by 1.2 percent, the German DAX Index is up by 1.6 percent and the French CAC 40 Index is up by 1.8 percent.

Automakers are moving higher after industry data showed EU car registrations gained 0.1 percent year-on-year in May, reversing a 0.4 percent fall in April.

On the other hand, German chipmaker Siltronic has slumped after a warning that U.S. restrictions on exports to China would hit its sales and profitability.

In economic releases, German economic confidence weakened sharply to a 7-month low in June, survey data from the ZEW-Leibniz Centre for European Economic Research showed.

The economic sentiment index declined 19 points to -21.1 in June. The score was forecast to fall moderately to -5.6. This was the lowest reading since November 2018.

The Ifo Institute downgraded Germany's growth outlook as the weakness in the industrial sector gradually spreads to other sectors.

In the summer forecast released today, the think tank downgraded its 2020 growth outlook to 1.7 percent from 1.8 percent. The forecast for 2019 was maintained at 0.6 percent.

The Eurozone trade surplus declined to a 5-month low in April as the decline in exports exceeded the fall in imports, figures from Eurostat revealed.

The trade surplus fell to a seasonally adjusted 15.3 billion euros in April from 18.6 billion euros in March. This was the lowest since November 2018. Economists had forecast a surplus of 16.3 billion euros.

U.S. Economic Reports

A report released by the Commerce Department showed new residential construction in the U.S. unexpectedly decreased from an upwardly revised level in the month of May.

The Commerce Department said housing starts slid by 0.9 percent to an annual rate of 1.269 million in May from an upwardly revised April estimate of 1.281 million.

Economists had expected housing starts to edge up to 1.239 million from the 1.235 million originally reported for April.

Meanwhile, the report said building permits rose by 0.3 percent to an annual rate of 1.294 million in May from a downwardly revised 1.290 million in the previous month.

Building permits, an indicator of future housing demand, had been expected to come in unchanged compared to the 1.296 million originally reported for April.

Stocks In Focus

Shares of MoneyGram (MGI) are soaring in pre-market trading on news Blockchain firm Ripple bought a $30 million stake in the money transfer company at a significant premium to MoneyGram's current market price.

Social media giant Facebook (FB) may also see initial strength after announcing plans to launch a new digital currency called “Libra” in the first half of 2020.

Shares of Alibaba (BABA) are also moving higher in pre-market trading after the Chinese e-commerce giant announced a major management reshuffle, with CFO Maggie Wu now overseeing the company’s strategic investments.

On the other hand, shares of Oracle (ORCL) may move to the downside after Macquarie Research downgraded its rating on the business software giant’s stock to Neutral from Outperform.
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