Spot values at a glance:
Asian stocks extended their rebound from a rough October, and headed for the biggest weekly rally since July 2016, amid hopes for trade talks and China stimulus. Sentiment proved resilient to underwhelming news from Apple Inc. that hit Nasdaq futures. 10yr Treasury yields edged higher ahead of tonight’s key US jobs report and the US dollar steadied after slumping overnight.
Trump, Xi Expresses Trade Optimism:
US President Donald Trump said he had a productive conversation with Chinese President Xi Jinping on trade and North Korea ahead of a highly anticipated meeting planned between the two leaders at the G-20 summit this month. “Those discussions are moving along nicely,” Trump wrote on Twitter Thursday. “Also had good discussion on North Korea!” Xi said he is open to talking with Trump about trade and other issues during the G-20 in Argentina, China Central Television said on Weibo, citing a scheduled phone call between the leaders.
Meanwhile, White House economic adviser Larry Kudlow said at an event in Washington that Trump and Xi might be able to break the logjam on issues during the Nov. 30-Dec. 1 summit. But Kudlow cautioned that Trump would “aggressively” pursue his agenda against China, if no deals were reached on intellectual property theft, cybersecurity and tariffs on commodities, among other issues.
News signaling improvements in US-China ties, in turn buoying the markets, would provide the president a chance to vie for support in midterm elections Tuesday that will decide whether the Republicans keep control of Congress.
Tech Rebound Hits a Snag Following Apple Earnings:
The Nasdaq 100’s biggest rally in almost 3 years ran into trouble late Thursday as Apple Inc.’s holiday forecast disappointed investors, dragging down tech stocks. Shares of Apple were down as much as 7.7% in extended trading, a decline that if sustained Friday would mark the worst earnings reaction in more than 4 years. The Invesco QQQ Trust, the biggest ETF tracking the Nasdaq 100 index, dropped 1%, poised to halt a three-day, 5.3% gain that was the biggest since early 2016.
Apple is joining tech giants such as Amazon and Alphabet in failing to instill confidence in a market that just suffered the worst month in seven years. Throughout October, as large technology stocks such as Amazon and Netflix sank, Apple remained relatively buoyant. That was at risk Thursday when the iPhone maker forecast disappointing sales for its fiscal first quarter.
The results are lending support to tech bears who say the group’s stretched valuations are unjustified with its growth advantage fading. Firms in the S&P 500 Information Technology index will probably say profits climbed by 19% in the third quarter, roughly in line with the market, before the rate eases to half that over 2 years.
US Factory Gauge Slumps to 6-month Low:
The US ISM manufacturing index fell by more than forecast to a six-month low, as orders and hiring cooled amid escalating trade tensions with China, data showed last night. The gauge for October dropped to 57.7, lower than the 59.0 estimated, from 59.8 the prior month. Measure of new orders and export orders fell as well.
The report may add to concerns that President Donald Trump’s trade war with China is starting to inflict more pain on manufacturing even as the industry continues to expand. The export-orders gauge fell for the third time in 4 months, while new orders decelerated for the fourth month in 5.
Synchronized Global Economic Slowdown Looms:
According to a Bloomberg report, the risk of synchronized slowdown in global growth as Europe wobbles, China sputters and stock markets around the world keep crumbling dominated the world economy this week. Adding to the gloomy picture, trade tensions reignited, emerging markets are under pressure and central banks face fresh challenges to their independence. In addition, the US is slated to report nonfarm payrolls data tonight that may reflect the effects of Hurricane Michael in early October, following Hurricane Florence in mid-September.
The trade war is starting to hurt China’s economy for good, with manufacturing output on the verge of contraction and export orders at a two-and-a-half low. The government in Beijing is prepared to respond with further stimulus but this may not be enough. Taiwan and Korea are also faltering, while the US is preparing to announce further tariffs in early December if, as widely expected, talks next month between presidents Donald Trump and Xi Jinping fail to ease tensions.
The chill is also hitting Europe, where the pace of growth halved in the third quarter even as inflation accelerated. With Italy stagnating and Germany set to do the same, only Spain remains as a bright spot. Emerging markets ended October in the red. This leaves the US to drive global growth. Consumers haven’t been this upbeat since the start of the millennium and the job market remains solid. To finance the tax cuts and spending hikes the Trump administration is planning to increase debt sales above the levels seen during the great financial crisis, and economists expect US growth will moderate in 2019. For now, though, Trump is going into the midterms with the strongest economy since Lyndon Johnson over 50 years ago.
Chinese Domestic Consumption Shows Signs of Slowing:
In a Bloomberg news article published earlier today, it was reported that a narrative that’s captured traders’ attention in recent weeks has been a “consumption downgrade” in the world’s second-biggest economy. With official data already showing retail sales growth slowing, investor alarm increased when China’s biggest liquor maker, Kweichow Moutai Co., reported its weakest profit expansion in almost 3 years.
Moutai alone lost 212 billion yuan in market value over 6 days last month. And stocks of companies that sell less discretionary items have done even worse. The Shenzhen CSI 300 Consumer Staples Index slid 22% in October, its worst month since the 2008 global financial crisis.
The next key tests will be next Single’s Day, a shopping bonanza promoted by online retailing giant Alibaba Group Holding Ltd., and spending over the lunar new year holidays next February. Bloomberg Intelligence analysts remain cautious on the prospects for spending during Single’s Day, noting that Chinese online appliance sales were weak in October.
Authorities are taking steps to shore up spending. A slowing auto market has been one major reason for the deceleration in retail sales this year, and China’s top economic planning body is proposing to halve the tax on car purchases to 5%, Bloomberg News has reported. Personal income-tax cuts are also on the table.
BOE Signals Faster Pace of Rate Hikes:
The pound headed for its biggest rally in about 18 months as the Bank of England signaled a faster pace of interest-rate hikes and investor hopes for a Brexit deal rose.
Sterling extended gains and gilts fell as the central bank said the economy may start running hot from late 2019, although it cautioned the impact of Brexit couldn’t be determined. Investors have brought forward expectations for a rate hike to November next year. The UK currency had surged earlier after the Times reported a Brexit deal has been reached for banks, and barely trimmed gains as British and European officials denied the story.
Investors seemed to have cast aside Governor Mark Carney’s warnings over the impact of a no-deal Brexit and EU chief negotiator Michel Barnier’s statement that the Times report on financial services deal was misleading. Carney said that businesses were “more wary” about Brexit and reiterated that a no-deal Brexit could result in the central bank opting for either a rate hike or a cut.
USDSGD extended its decline from yesterday, slipping further below 1.3800 on the back of broad USD weakness and a swing to risk-on sentiment earlier today. A failure to break above its 2018 high of 1.3873 this week could mean a retest of the uptrend line again next week, with the medium-term support at 1.3728.
AUDUSD continued to see a lift earlier today as Aussie bulls shrugged off a missed retail sales reading, opting to focus on PPI numbers that came in better than expected. The pair is trading around the 0.7200 handle, after gaining by as much as 1.8% since Tuesday. The downward trend since the start of the year is currently being tested; a strong break above it could signal a potential reversal to come. The next resistance lies at 0.7315.
USDCAD slid to a 1-week low overnight, bottoming out at 1.3069, following a broadside weakening of the greenback. The decline in USDCAD as limited by the decline in crude oil prices, which slumped to a 4-month low. A point of inflection lies in wait for USDCAD. A break above 1.3326 would confirm the breakout the upside of the 33-month old wedge triangle pattern.
USDCNH extended its sharp fall yesterday, bringing its 2-day decline to as much as 1%, and essentially wiping out the bulk of its gains over the past 2 weeks, amid easing trade war concerns. The PBOC earlier today strengthened its daily reference rate for the yuan by the most since Aug. 28. Key Chinese trade data for October is due to be reported next week, and will provide the latest indication of the impact of its trade war with the US.
USDJPY has slipped back below 113 following the US dollar’s overnight weakness. More volatility is expected later today, ahead of tonight’s nonfarm payroll numbers. The pair’s key resistance remains at 114.55, a level that has held 3 times since July last year.
The pound briefly posted its biggest increase against the US dollar in over a year as Brexit optimism swirled, while the greenback suffered its worst day since March ahead of key events including next week’s midterm elections. GBPUSD climbed above the 1.3000 handle last night, although it has since pared back some gains.
Despite its rebound, the longer-term bias continues to remain to the downside; the longer-term resistance level being 1.3300. A resurfacing of Brexit concerns may push the pair back to sub-1.2500 levels by year’s end.