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Dow surged over 200 points early Thursday on tech optimism led by Apple and Micron, while banks dragged after a dovish hold by Fed and subsequent fall/flattening in US bond yields, negative for their business/lending model. The US stock market was also undercut by a higher US dollar index (DXY) on Thursday, which soared almost +0.90% to a session high of 96.62, primarily on Brexit woes as EURUSD plunged almost -0.55%, while GBPUSD tumbled around -1.30%. Energies also dragged the market as oil slips around -0.50%.
Techs/Chip makers were mainly boosted by Apple and Micron optimism. A lower borrowing cost (after a dovish hold by the Fed) is also positive for techs (startup/innovation investment and higher consumption).
Apple surged on an imminent launch of its video streaming services and subsequent analysts’ upgrade coupled with buyback, which is close to ending. Micron jumped as it sees “a recovery in memory chips coming” in H2CY19, despite reporting in line with estimate EPS and projected below-expected guidance.
Chipmaker giant Micron reported an EPS of $1.71, down sharply from a year earlier, but higher than the estimate of $1.67. Revenue of $5.84B fell 20.6% from the same period last year but beat forecasts of $5.82B. Adjusted free cash flow (FCF) in the quarter hit $1B. Micron said it would cut capex this fiscal year to $9B while forecasting revenue of between $4.6 billion and $5 billion.
The company's revenue estimate (guidance) came in below Wall Street estimates, but, like many of its rivals, Micron said it expected semiconductor demand will accelerate in the second half of the year as inventory overhangs erode and global smartphone sales rebound.
The Micron CEO Sanjay Mehrotra said:
"The slowdown in demand is a result of ongoing customer inventory adjustments, as well as software optimizations at some cloud customers. We expect growth to resume in the second half of calendar 2019 as we see improvement in our customers' inventory position. Micron continues to execute well across a range of product, operational and financial initiatives against the backdrop of a challenging market environment. These initiatives and our focus on high-value solutions, cost competitiveness and innovation will enable us to emerge even stronger as the market environment improves”.
But Dow was also dragged by renewed Boeing woes as FBI joins criminal probe into Boeing's 737 MAX. As per late Wednesday report (just after the US market closing), the FBI has joined the criminal investigation into the certification of Boeing's BA 737 MAX jet, joining a probe already being conducted by the US Department of Transportation. The FBI is assisting federal transportation authorities in their investigation into the jet's certification process, which has come under criticism for possible cozy relationships between Boeing and Federal Aviation Administration inspectors. There was also another report that Pentagon is investigating whether acting US defense secretary improperly helped Boeing.
Meanwhile, European and Canadian regulators plan to conduct their own reviews of changes Boeing is making after two of the jets crashed, one earlier this month in Ethiopia and the other in October and also want to do more than simply take the FAA's that alterations to a key flight-control software/hardware (sensor) system will make the 737 MAX safer. Elsewhere as per reports, Boeing hopes by Monday to finish an update to the software that can prevent to automatically point the airplane nose sharply downward in some circumstances to avoid an aerodynamic stall.
Biogen plummeted and was the biggest drag on the S&P and Nasdaq, after the Biotech drug maker and its subsidiary, Elisa said they would discontinue two trials testing an Alzheimer's drug. As a result, healthcare/biotech sectors are in stress.
On China trade, there was a report that Trump is insisting on more buying of US goods (2/3 times of present commitment levels) by China. The report said: “The US officials/negotiators seeking a China trade deal are focused on long-term structural changes to that nation's economy. But President Trump is set on reducing the trade deficit and is pushing his negotiators to get China to agree to purchase more American goods. China has already pledged to purchase $1.2T in US goods but Trump wants them to double or triple it and has renewed the call in recent weeks”.
As a reminder, China may exclude its buying commitment of the controversial Boeing-737 MAX jet from the US after the two recent accident tragedy and thus the US now have to sell those products more, which China actually requires.
On early Thursday, the US market was also boosted by a deluge of upbeat economic data that includes jobless claims and Philly Fed manufacturing index just a day after Fed projected a subdued US economy for 2019 and goes on “neutral” (patient) mode.
Dow slips Wednesday amid renewed US-China trade war jitters coupled with Fed’s credibility and projection of lower US economic growth despite a dovish hold by Fed:
The US stock market slips Wednesday amid renewed US-China trade war jitters coupled with Fed’s credibility and projection of lower US economic growth despite a dovish hold by Fed. Although it may be premature, the market has a concern after sudden flip-flops of Powell & Co- “What does the Fed know that nobody else does for it to capitulate so abruptly, and what might be lurking in the shadows?” Banks & financials dragged the US market on the concern of lower/flattened bond yields (negative for their business/lending model) after a dovish hold by Fed.
On Wednesday, the US dollar slumped and Dow soared after a dovish hold by Fed as it projected no further rate hikes in 2019 and will also taper/halt the QT (B/S reduction) partially by Sep’19. The market was expecting at least one dot (rate hike probability) by the Fed in 2019 and end of QT by H2CY2020. In the longer run, the Fed will maintain a B/S size at around $3.76T, against an earlier expectation of $3.5T.
On Wednesday, as highly expected, the Fed kept the US rate unchanged at +2.40% (2.25-2.50%) unanimously and also the IOER (Interest Rate on Excess Reserves) unchanged at 2.40%. The Fed intends to slow/taper balance sheet runoff starting in May and ending in September (partially-only Treasuries), provided economy evolves as expected.
Subsequently, soon after Fed/Powell, the US dollar index (DXY) plunged almost -0.65% to a low of 95.75, the 10Y US bond yield tumbled almost 10 bps to 2.524% and Dow jumped over +200 points (from its session low) to a session high of 25906.30.
At present, the Fed is allowing a maximum of $30B of Treasury securities to roll off its balance sheet every month. Starting in May, the maximum amount of Treasury securities that will be allowed to roll off will be reduced to $15B per month and further starting in October the overall size of the balance sheet will remain unchanged, for an unspecified period of time. The Fed is currently tapering its $4.5T B/S by $50B/per month ($30B treasuries and $20B MBS) in an auto-pilot mode.
In October, the Fed will purchase enough Treasuries to offset the reduction in MBS holdings. The aggregate portfolio will be unchanged starting in October. Thus the US bond yield will be under stress and it’s like the YCC (yield curve control) by the BOJ (negative for banks & financials).
While overall, the B/S announcements were consistent with what the market consensus had anticipated, the biggest surprise was the decision to reinvest US Treasuries across the curve as opposed to concentrating these reinvestments at the front end, meaning that there are no plans to launch a reverse Operation Twist at this time (less dovish than expected).
Overall, the Fed is quite dovish about the US economic (GDP) growth prospect, household spending, and private/business capex, while neutral about US core inflation (although dovish about headline CPI) and employment (upbeat wage growth but downgraded its unemployment forecast). Thus Fed is refrained from further rate hikes and stopped its “runaway loco” at +2.50% after the last rate hike in Dec’2018 (total 9-rate hikes from Dec’2015 in its rate hiking cycle of 3-years from +0.25%).
Although the Fed is projecting no more rate actions in 2019 and 1-rate hike in 2020, the market does not believe anymore in Fed’s dot-plots and the FFR future is showing a rate cut by Fed in Dec’2019 or Q1-2020 as the US economy could slow down considerably. In brief, after Wednesday’s surprised flip-flops by Powell & Co (FOMC) and more dovish than an expected stance, the credibility of the Fed’s dot-plot and economic projections are now at stake.
Overall, the sudden flip-flops of Powell is not at all unexpected, considering the Fed is now under immense pressure from both the Wall Street and Real Street (as after all, the “great US economy” is not strong enough to sustain a 30Y mortgage at +4.50%), besides consistent political pressure from Trump.
But although Powell may not hike in 2019 and thereafter for the foreseeable future, Powell is not ready to cut either and launch QE-4 contrary to the expectations of the market. Together with this, Fed’s subdued forecast of economic growth in 2019 (possible slowdown) and lingering US-China trade tensions, Dow fades Powell “put” surge and closed in red on Wednesday soon after Powell presser. The bond market is now also concerned the Fed committed another policy error, with the yield curve inversion once again imminent. The market is also concerned that the Fed knows something, which the market does not.
The biggest surprise was the decision to reinvest Treasuries across the curve as opposed to concentrating at the front end. And despite the $1.3 trillion in reserves, it is all too likely that banks will find themselves starved for liquidity as the US Treasury issuance spree picks up, negative for the US bond yields across the curve and in turn, also negative for banks & financials (negative for their business/lending model).
Also, even with a Fed pause and end of dual QT, monetary policy divergence, much better US economic data, Trump’s trade war rhetoric, the EU political jitters and interest/bond yield differential with BOJ/ECB/BOE, the US dollar will remain the “king” and the overall Fed impact will be minimal.
On Wednesday, Dow surged on Fed’s “more dovish” surprise, but as the Powell presser ends, the market was concerned just how much fear The Fed must be feeling about the US/global economic growth to take such a dovish stance to its rate forecasts and Dow plunged (as the economy may worsen and a slowdown/recession is looming).
Earlier, before Fed, Dow tumbled over -200 points and made a session low of 25670.63 after Trump said his administration was discussing leaving tariffs in place on Chinese goods for a “substantial period of time”, although he is expecting a “great China trade deal” in the coming days.
On Wednesday, speaking to reporters as he left Washington for Ohio, the US President Trump said he wasn't considering removing tariffs on China: “We have to make sure that if we do the deal with China, that China lives by the deal. Because they’ve had a lot of problems living by certain deals and we have to make sure. We are talking about leaving tariffs on China for a long period of time, but the deal is coming along nicely with China as the US trade negotiators are going to China soon. China deal has to be a good deal and if it’s not a great deal, we’ll never catch up. But tariffs could be left on China for a long period of time until China complies with the deal."
Dow was also under pressure after Trump said US tariffs on Chinese goods could stay on for a long period of time: "We're not talking about removing (tariffs), we're talking about leaving them for a substantial period of time because we have to make sure that if we do the deal with China that China lives by the deal. They’ve had a lot of problems living by certain deals”.
Trump said he’ll keep tariffs on China until he’s sure China is complying with any trade deal. As a pointer, China has pushed the Trump admin to remove tariffs for its IP commitments and expectations had been that both nations would agree to roll back duties as part of a trade war truce. Trump’s comments dim hopes that round-the-clock trade negotiations between the world’s two biggest economies could lead to them removing the roughly $360B in tariffs they’ve imposed on each other’s imports.
Dow on the back foot early Wednesday on FedEx woes and renewed China trade deal jitters despite hopes of a dovish hold by Fed
Dow was on the back foot early Wednesday (opening session) on FedEx woes and renewed China trade deal jitters despite hopes of a dovish hold by Fed later in the day. Dow plunged almost -150 points to an opening session low of 25753.79, dragged mainly by FedEx after the company issued another guidance warning for the second time in three months. After the US market hours on Tuesday, FedEx, the US as-well-as global logistic giant and a bellwether for the global/US economy cut its FY-19 profit forecast after posting weaker-than-expected Q3 earnings.
The FedEx guidance warning was also followed by a similar warning by the investment banking giant UBS and German automaker BMW, prompting the renewed concern of a global slowdown.
On late Tuesday, FedEx said it expects an EPS for FY-19, which ends in May, in the region of $15.10 to $15.90, down from its December forecast of $15.50 to $16.60 and $0.07 below of analysts' forecasts. FedEx said challenges linked to its $4.8B acquisition of TNT Express, a key component of its international business, continues to weigh on profits, amid a broader global/domestic slowdown in trade and package demand (Trump trade war and government shutdown).
The FedEx CEO Smith said on a conference call late Tuesday:
"Part of the problem about reporting quarterly earnings is, you're looking in the rearview mirror. The facts of the matter are that we actually are seeing a few green sprouts now as we go into the spring. And quite frankly, we're under-reported I think because of the government shutdown and the trade issues. This was a very, very tough operational winter and in some cases unprecedented, but again somewhat under-reported. So, we are seeing some pickup across the Pacific. Our package business in Europe is now growing again. And so, we're feeling a little better about things. And obviously, the range of the fourth quarter and the fiscal year is related to our caution”.
On Wednesday, the US market was dragged by chip makers (AMD, Micron on China trade deal suspense and Trump tantrum), banks & financials (led by GS on Lyft IPO issues and a dovish hold by Fed, negative for bond yields; JPM, BOA, Citi, and MS followed.), healthcare (regulatory/pricing concern), materials (lower metals/iron ore after reopening of Vale mines and renewed China trade war tensions) dragged, but energies helped as oil recovered on surprised inventory drawdown report from the EIA. Techs including Apple also helped on buyback optimism and lower borrowing costs (after a dovish hold by the Fed).
Transportation was in stress as FedEx, UPS dragged. General Mills jumped on an upbeat report card after the packaged food company reported better-than-expected quarterly profit and boosted its full-year guidance. Out of 11-major SPX-500 sectors, 6-were in red.
On Wednesday, the blue-chip Dow Jones Industrial Average (DJ-30) slumped -0.55% to close around 25746.15, near the mid-point of session low-high of 25672.37-25928.97 in a day of volatile trading. The broader S&P 500 (SPX-500) slips -0.29% to close around 2824.33, near the mid-point of session low-high of 2812.43-2843.54. The tech-heavy Nasdaq Composite (IXIC) ticked up +0.06% to close around 7728.97, almost at the mid-point of the session low-high of 7674.04-7779.24.
Technically, whatever may be the narrative, SPX-500 has to sustain over 2825 for a further rally to 2840/2865*-2900*/2925 and 2950*/2985-3020/3050 in the near term (under bullish case scenario).
On the flip side, sustaining below 2810, SPX-500 may fall to 2785*/2745-2720*/2695 and 2675/2650-2635/2610 in the near term (under bear case scenario).
Technically, whatever may be the narrative, DJ-30 has to sustain over 26300* for a further rally to 26555*/26685-26850/26955* and 27050*/27380-27750/28100 in the near term (under bullish case scenario).
On the flip side, sustaining below 26250-26100, DJ-30 may fall to 25600*/25400-25200/25100* and 24950/24850-24650/24200 in the near term (under bear case scenario).
Technically, whatever may be the narrative, NQ-100 has to sustain above 7590 for a further rally to 7685/7735*-7790/7850 and 7905/7955-8040/8120 in the near term (under bullish case scenario).
On the flip side, sustaining below 7570, NQ-100 may fall to 7450/7360*-7245/7190* and 7090/7050-7000/6930* in the near term (under bear case scenario).
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