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Dow crumbled Thursday on renewed uncertainty about U.S.-China permanent trade deal coupled with Trump's impeachment saga; Dow Future surged early Fri on another Goldilocks U.S. NFP job data

calendar 01/11/2019 - 13:33 UTC

The U.S. stock market crumbled Thursday on renewed uncertainty about U.S.-China permanent trade deal and Trump’s impeachment saga and the concern of slowing Chinese economy. But Dow recovered from the session low in late day trading on deregulation optimism after U.S. Treasury Secretary Mnuchin moved a bill to weaken corporate inversion rules. Mnuchin said inversion rules unnecessary after GOP tax law.

The risk-on trade was already under pressure early Thursday on renewed suspense of Phase One China trade deal as Chile APEC summit was canceled at which Trump and Xi were supposed to meet and sign the ‘historic’ tentative trade deal. Chile cited intense public protests in the country against surging cost of living (inflation) and alleged issues of inequality.

As a recapitulation, Chile’s cancellation of the APEC summit caught the White House by surprise. A Trump admin official said Washington learned about the decision from news reports and is seeking more information from Chilean authorities.

Although, U.S.-China Phase One deal signing could happen in either of the two countries U.S. and China directly, rather than in a 3rd country, the risk-on trade as-well-as Dow slips on the headline as a further delay in U.S.-China tentative trade deal may cause more protracted synchronized global slowdown.

But the overall impact of much-awaited Chile APEC cancellation was limited as there was already a report late Tuesday on the renewed concern of a tentative Phase One trade deal between U.S. and China. There was a report that China and the U.S. might not sign a partial trade deal next month. This follows barely a day after Trump’s optimism (jawboning) that negotiations were ahead of schedule and he may sign the Phase One deal with Xi mid-Nov at Chile APEC meeting. But Trump also said that it’s not guaranteed and it would be ‘fine too’ if the deal was not finalized by the APEC summit. On Wednesday, the White House Chief of Staff Mulvaney said: “We’re still working to get Trump-Xi summit on board”.

Earlier Thursday, China Commerce Ministry said: “China–U.S. trade teams are maintaining close communication and trade negotiations progressing well, will continue to proceed with negotiations according to the previous plan. And lead China, U.S. trade negotiators will hold a telephone call on Friday. President Xi and Trump have been maintaining contact through various means”.

Further, on Thursday, China’s twitter proxy, the GT editor tweeted:Based on what I know, Chile canceling APEC summit will not affect arrangements of the China-U.S. trade talks. The talks are progressing smoothly and will move forward as planned”.

Also, China’s trade association chief said: “Beijing could remove extra tariffs on U.S. farm products to help importers buy up to $50 bln worth and such removing extra tariffs would let Chinese importers buy U.S. farm products based on market conditions”.  As a pointer, China is not willing to buy excess U.S. farm products to the tune of $50B/pa as its far way than its actual requirement (demand).

On the other side, another report suggested that the U.S. is considering extending some Chinese tariff exclusions expiring Dec.28 and the USTR is seeking public comment on whether to extend some exclusions.

But on Thursday, hours ahead of the U.S. market opening, all the hopes and hypes of U.S.-China trade deal evaporated and risk-on trade as-well-as Dow Future slumped on further suspense of U.S.-China trade truce after a report that China has doubts over the possibility of a long-term trade deal with the U.S. despite progress on an interim trade deal amid U.S. demand for so-called Chinese structural reform (intended to ‘change’ China).

China also reportedly blamed Trump’s impulsive (whimsical) nature and there is a risk that Trump may even back out of the limited deal at the last moment that both sides are about to sign in the coming weeks. This would be a major humiliation for China’s President Xi. Clearly, China does not trust the credibility of Trump and his ‘morning mood’. Chinese officials reported said: "Trump’s impulsive nature and the risk he may back out of even the limited deal both sides say they want to sign in the coming weeks".

The report also suggested that Chinese officials have warned that they won't budge on structural issues either, and China is demanding an end to all types of additional Trump tariffs in order to begin any talks for ‘Phase Two’. The report also pointed out that this doesn't mean that a ‘Phase One’ deal is off the table but it certainly highlights that what both sides are working towards in November is essentially pointless overall. The trade/cold war is merely put on ice; (ceasefire), even after Phase one; it doesn't mean it is over.

The report said:

Many senior Chinese officials quietly suspect that the Phase One partial trade deal will soon fall apart and that the odds of the two sides reaching a more comprehensive final deal are effectively zero. The so-called Phase One trade deal is Chinese purchases of US farm goods and other products such as aircraft. It’s also expected to include Chinese commitments to protect U.S. IP and an agreement by both sides not to manipulate their currencies. In return, Trump agreed to drop the planned October tariff hikes, while remaining open to dropping the December hike as well. Beijing would accept to move ahead with Phase 1 only if there is a commitment from the Americans to removing all tariffs in Phase 2 and agreeing to cancel the next round of tariffs, set to take effect in December.

China’s position is that tariffs don’t all have to be removed immediately, but they must be part of the next stage. China also wants Trump to cancel a new wave of import taxes due to take effect Dec. 15 on American consumer favorites such as smartphones and toys as part of the phase one deal.

While Beijing officially remains open to more talks, senior officials privately don't see much of a point. Many of the big structural changes that Washington is demanding are simply unacceptable to Beijing and have been since the beginning. With Washington refusing to budge on lifting all the new trade war tariffs, any big ‘asks’ will likely be ‘off the table, seeing as Beijing insists that removing all of the new tariffs be part of any final deal. Doing otherwise would simply be ‘politically unfeasible’ for Xi.

As a pointer, on early Thursday, the U.S. Secretary of State Mnuchin said the U.S. must engage with China without trying to ‘change’ the nation: “We accommodated China’s rise, in the hope that they would become freer (open) in response, but the CCP took advantage of our goodwill. Now, President Trump is facing the reality of CCP hostility to the U.S. and our values. We must engage China as it is, not as we wish it to be”.

In any way, on Thursday, in an apparent bid to recover Dow, the White House CEA Kudlow said: “U.S.-China trade talks are going smoothly”.

And Trump tweeted just 5-mins before the U.S. stock market opening, expressing renewed optimism about Phase One deal after cancellation of the APEC summit at Chile: “China and the USA are working on selecting a new site for signing of Phase One of Trade Agreement, about 60% of total deal, after APEC in Chile was canceled to do unrelated circumstances. The new location will be announced soon. President Xi and President Trump will do signing!”

Further Trump blasted Fed/Powell, just a day after the U.S. Central bank cuts another -0.25% with an indication that the current easing cycle may be almost over. Trump is now trying to force the Fed to cut another -0.25% in Dec and thus creating uncertainty about Phase One deal.

Trump tweeted:

“People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow. They even tightened in the beginning. Others are running circles around them and laughing all the way to the bank. Dollar & Rates are hurting...our manufacturers. We should have lower interest rates than Germany, Japan, and all others. We are now, by far, the biggest and strongest Country, but the Fed puts us at a competitive disadvantage. China is not our problem, the Federal Reserve is! We will win anyway”.

On Thursday, the U.S. market as-well-as risk-on trade and oil was also under stress as Trump’s impeachment inquiry (proceedings) begins. As a pointer, Bolton, the former NSA and suspected witness (source) for the Ukraine whistleblower are also summoned by the U.S. Congress to testify. Trump tweeted:The Impeachment Hoax is hurting our Stock Market. The Do-Nothing Democrats don’t care! The Greatest Witch Hunt In American History!”

On Thursday, oil was also under stress on the concern of the Chinese slowdown after another spate of subdued PMI data. A slowing Chinese economy is not good for various U.S. MNCs/exporters exposed directly or indirectly to China and thus also negative for Dow in this age of globalization. As a reminder, China is now not very far away from the U.S. on consumer spending. But now Chinese consumer confidence and consumption are now under stress on protracted Trump trade war and deleverage.

China’s manufacturing PMI further contracted to 49.3 in Oct from prior 49.8, lower than the expectations of 49.9 and is in 6th straight months of contraction (below boom/bust line of 50.0). The non-manufacturing (service PMI) also dropped to 52.8 from prior 53.7, lower than the expectations of no change at 53.7.

Further Looking at some details, new export orders dropped for the 17th month to 47.0, down from 48.2, while employment improved slightly but remain deep in contraction at 47.3, up from prior 47.0. The overall set of data suggests that while China’s growth is already at the slowest pace in 30 years, there is no sign of a definitive rebound yet.

Market Wrap:

On Thursday, the blue-chip Dow Jones Industrial Average (DJ-30) crumbled -0.52% to close around 27046.23, almost at mid-levels of session low-high of 26918.29-27188.37 in a day of moderate volatility. The broader S&P 500 (SPX-500) slumped -0.30% to close around 3037.57, almost at the mid-point of session low-high of 3046.90-3023.19. in a day of moderate volatility. The tech-heavy Nasdaq Composite (IXIC) edged down -0.14% to close around 8292.36, near the mid-point of session low-high of 8248.81-8321.80 in a day of moderate volatility.

On Thursday, the broader U.S. market was dragged by China trade-sensitive industrials, materials, energies, chipmakers and techs to some extent as-well-as other domestic economy facing consumer discretionary, consumer staples, financials (lower bond yields), healthcare, real estate,, while helped by utilities (higher dividend-paying/bond proxies; beneficiary of lower interest rates/Fed cuts) and communication services. Out of 11-major SPX-500 sectors, 9-were in deep to moderate red. And out of 30-Dow scrips, only 5-were in green: Apple, Exxon Mobil, Coca-Cola, Merck, and Walt Disney.

Apple and Facebook saved the day, while Boeing dragged on lingering controversy over the 737-MAX fiasco. Apple jumped on an earnings beat and upbeat guidance about sales in the forthcoming holiday shopping season (Q4). Similarly, Facebook surged on earnings beat, solid Q3 revenue and higher ad sales.

On early Friday, Dow Future surged almost +0.45% on U.S. economic optimism after an upbeat/Goldilocks U.S. NFP job report, much better than expected. Dow Future was also boosted by an unexpectedly strong Chinese Caixin manufacturing PMI at 51.7 in Oct from prior 51.4 and higher than the expectations of 51.0. The Caixin manufacturing PMI mainly covers China’s MSMEs, while the official PMI released on Wednesday covers mainly China’s medium to large corporates (big business), was in sharp contraction. The Caixin PMI may be indicating that China’s MSMEs are now not so bad health, although it may be due to Trump tariff exemptions and higher export orders amid holiday/X-Mas season as both domestic and foreign demand improved substantially.

Looking at some details of China’s Caixin manufacturing PMI, new orders expanded at the quickest rate since January 2013. Output growth accelerated to a solid pace. Outstanding work rose further. But employment declined again.

Caixin/CEBM said China is gradually recovering from the progress of Trump trade war truce and domestic fiscal stimulus:

“The Caixin China General Manufacturing PMI stood at 51.7 in October, up from 51.4 in the previous month and marking the fastest pace of expansion since February 2017. This pointed to a continued improvement in the manufacturing industry. Both domestic and foreign demand improved substantially. The sub-index for new orders stayed in positive territory and rose to the highest level since January 2013. The gauge for new export orders returned to expansionary territory and reached the highest point since February 2018, due likely to the U.S.’ move to exempt more than 400 types of Chinese products from additional tariffs.

Production growth accelerated further. The output sub-index stayed in positive territory and rose for the fourth straight month, hitting the highest level since December 2016. As new orders grew at a faster pace in October, the measure for stocks of finished goods dipped into contractionary territory. The labor market contracted further. The employment sub-index dropped to the lowest level in 13 months. As China’s demographic dividend is fading, there has been pressure on the growth of the labor force.

The sub-index for suppliers’ delivery times fell further into negative territory. Delivery delays to some extent implied bottlenecks in production capacity and stocks of finished goods, and also reflected manufacturers’ subdued confidence. The sub-index for stocks of purchased items edged slightly lower, indicating a cautious attitude towards replenishing inventories. Both the measures for input costs and output charges dipped slightly, suggesting that prices of industrial products were stable in general.

China’s manufacturing economy continued to recover at a relatively quick pace in October. New orders placed with companies improved substantially, and new export orders rose at the fastest pace since the Sino-U.S. trade war broke out. However, business confidence has been weak. Deliveries of inputs were further delayed. Inventory activities were subdued. The employment sector continued to contract. If the improvement in demand, including that generated by infrastructure projects and exports, is able to continue, the manufacturing sector can gradually build a foundation for stability.”

Further on U.S.-China trade war/truce, there were some positive developments at the current session of China’s communist party conference (CPC). A party official on the economy said China will create an environment for all types of firms to compete on equal footing (in China). The PBOC Governor Geng said: “China and U.S. have maintained close contact on the meeting of two leaders, while talks are going well and smoothly”.

Also, China’s Ministry of Justice issued draft rules related to foreign investment law; indicating China will allow foreign-funded firms to raise funds via stock, bond issuance in China and overseas. This also indicates that China is gradually opening itself to the global economy, which is a core demand of the U.S.

Technical Outlook: SPX-500, DJ-30, and NQ-100

Technically, whatever may be the narrative, SPX-500 now has to sustain over 3055 for a further rally to 3075*/3090-3105/3130 and 3160/3190-3230/3285 in the near term (under bullish case scenario).

On the flip side, sustaining below 3050-3020*, SPX-500 may fall to 3005/2980-2950*/2930 and 2915*/2900-2870/2855* in the near term (under bear case scenario).

Technically, whatever may be the narrative, DJ-30 now has to sustain over 27150 for a further rally to27325*/27450*-27650/28005 and further 28350/28630-28905/29100* in the near term (under bullish case scenario).

On the flip side, sustaining below 27100, DJ-30 may fall to 26975*/26795-26575/26475* and further to 26350/26200*-25900/25700* in the near term (under bear case scenario).

Technically, whatever may be the narrative, NQ-100 now has to sustain above 8150 for a further rally to 8255*/8285-8305/8375 and further to 8475/8575*-8705/8880 in the near term (under bullish case scenario).

On the flip side, sustaining below 8135-8050, NQ-100 may fall to 7995*/7940-7870/7795 and 7730/7650*-7615/7565-7525/7470 in the near term (under bear case scenario).


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