Weaker US open in prospect
US stock index futures were drifting lower in early trade this morning. Speculators modestly cut their exposure to the major indices after US President Donald Trump threatened to increase tariffs on Chinese imports if Beijing continued to drag its heels over a trade deal. There was also some disappointment following the latest trading updates from big US retailers.
No deal yet
Hopes were raised earlier this month that a ‘phase one’ trade agreement between the US and China was close to being signed off. That could have led to the Trump administration cancelling a fresh round of tariffs planned for December. However, it’s understood that China is pushing for the removal of all existing tariffs, as a precursor to addressing US issues over forced technology transfers, intellectual property theft and opening Chinese markets to US corporations. On this basis, it looks as if a comprehensive deal could be a long way off. China has also lashed out after the US senate passed a bill yesterday supporting the Hong Kong protestors. The demonstrations show no sign of stopping and have become increasingly violent since they began in June this year.
Retailers disappoint
The US majors posted fresh records on Monday after the Trump administration issued a new 90-day extension allowing US companies to continue doing business with China's Huawei. But yesterday saw all the major US stock indices close lower. Aside from the lack of positive trade news, yesterday saw some disappointing earnings reports from some of the biggest US retailers. Home Depot and Kohl’s both downgraded their full-year sales forecasts for the second time this year. Their shares ended down 5.4% and 19% respectively. Other big retailers were also hit hard with Nordstrom down 6.3% and Macy’s off nearly 11%. Today we have updates from Lowe’s, Target and L Brands.
Fed minutes
This evening sees the release of minutes from the Federal Reserve’s October policy meeting. This was when the US central bank lowered the federal funds rate by 25 basis points for the third time in four months, taking it to a target range of 1.5% to 1.75%. Meanwhile, global economic data continues to disappoint overall. Last week, US Industrial Production fell to its lowest level since March 2009. On top of this US freight volume (year over year) has been negative for 11 consecutive months. The poor data saw the Atlanta Federal Reserve and New York Federal Reserve downgrade their forecasts for US fourth quarter GDP to +0.3% from 1.0% a week ago and to +0.4% from +0.7% respectively. US Unemployment is, at 3.6%, near a 50-year low. But some analysts have pointed out that a drop below 4% is often a precursor to a recession (after all, there’s little room for further improvement) as is an inverted yield curve, particularly when it unwinds and steepens as has happened over the last two months. Meanwhile, equities continue to get support from central bank stimulus, with low rates and asset purchases from the US Fed and European Central Bank.
Charts
The uptrend is still in place and the 50, 100 and 200-day moving averages remain stacked up in bullish fashion. There’s been an attempted breakout of the bullish channel that has formed since the summer. However, that failed yesterday, and prices have continued to slip in today’s early trade. Given the unbroken rally that has taken place over the last seven weeks, it feels as if a correction is well overdue. Whether that happens or not before the year-end is another matter.
Adding in the Commodity Channel Index (CCI), it’s apparent that the S&P remains overbought around the 100 mark. It’s also worth noting the slight bearish divergence since September which has seen the S&P trend upwards while the CCI has made a lower high. It’s early days of course, and much will depend on how the US/China trade dispute develops. At the same time, the US Federal Reserve continues to support the market with its $60 billion monthly Treasury bill purchases.
David Morrison
