The US stocks market surged Monday on Fed Chair Powell’s patience, renewed hopes of China trade deal summit (by April), an orderly smooth Brexit and talks of Chinese stimulus to fight the slowdown, primarily caused by Trump trade war. As the US economy and various US MNCs (industrials, techs) are now deeply related to China, the Chinese slowdown as-well-as signs of some US slowdown may be the prime reasons behind a deluge of subdued guidance (by various US MNCs). Thus talks of Chinese stimulus and trade truce is sentimentally positive also for the US/global market.
On Monday, Dow surged over +200 points on the boost of techs including Apple (NASDAQ:AAPL) despite another Boeing (NYSE:BA) accident tragedy in Ethiopia on Sunday. As a pointer, Boeing, a Dow heavyweight, fell sharply following the second crash in six months involving the US aerospace giant's same 737 MAX 8 jet. The incident also forced China, Indonesia, Australia, and Singapore to ground its entire fleet of 737 MAX 8 aircraft. Some other countries may also follow soon and Boeing may also withdraw the controversial model in the coming days as it involved another similar accident just 6-months ago in Singapore for the probable reason of an AI bug in the software.
Boeing is the biggest component of the price-weighted Dow Jones Industrial Average and the only of the 30 blue chips to retreat. China is the biggest importer country of Boeing. But Boeing also recovered from the opening session low of 365.55, closing around 400.01, just shy of the session high of 402.67 and helped Dow and industrials to recover from a deep loss. Boeing recovered as the US aviation regulators signaled their confidence in the safety of the aircraft, issuing a global notice of “continued airworthiness”, but emphasized they will "take immediate action" if regulators identify any safety issue. In any way, still, Boeing plunged over 5% and shoved off almost 150 points from Dow by Monday closing.
The US market was also boosted by renewed hopes of China trade deal summit by April and talks of Chinese stimulus.
On Sunday China's PBOC Chief Yi said that Beijing and Washington were getting close to reaching a currency deal as part of their continuing negotiations to settle the trade dispute. Yi said: "Both sides have reached consensus on many crucial and important issues. As part of the agreement, China won't engage in competitive devaluation to give Chinese exporters a leg up in foreign markets - a commitment Chinese official has also made in multilateral agreements such as those among the G-20 industrial nations. This is what we promised. Absolutely we won't do this. The US and China discussed respecting the autonomy of each other’s monetary policy”.
On Sunday, China’s PBOC pledged to further support the slowing economy by providing more loans and lowering borrowing costs after data showed a sharp decline in lending data due to seasonal factors. Furthermore, the PBOC Governor Yi stated there is still some room for a RRR cut although the amount of room is less compared with a few years ago and there were also comments from PBOC Deputy Governor Pan that they will keep liquidity ample and set up counter-cyclical adjustments, while a Chinese central bank official also noted that February money supply data is normal and in line with historical trends. The PBOC pledge came as data showed new bank loans in China dropped a far more than expected in February, while money supply growth also missed forecasts.
On Saturday, The Chinese Vice Commerce Minister Wang also said that any “enforcement mechanism for a prospective trade deal must be two way, fair and equal”. Apparently, Chinese officials were avoiding any mention of one-sided pledge on currency. China is now basically concerned that the proposed trade agreement could put few restrictions on Beijing’s control over the strength of its currency.
On late Friday there was a report that the Chinese government has virtually canceled the earlier planned trip to Mar-a-Lago and cut it off from Xi’s official calendar for March; i.e. the March summit is now canceled. But at the same time, there was another report that Chinese officials may send another trade delegation to the US to finalize a trade deal (final terms & conditions) before a Presidential face to face summit. The White House CEA Kudlow also said earlier there will be a meeting between Trump & Xi, but it could be April.
The report also suggested that the White House spokeswoman Sanders told privately that “negotiations are ongoing” about a potential Trump-Xi meeting to discuss the China trade deal. But there’s “nothing officially on the schedule”.
On the other hand, the White House CEA Kudlow said “There was a breakthrough with China agreeing to promote stable currency and avoid competitive devaluation. I am positive and bullish on a US-China trade deal. And I expect the agreement to be finalized by April. Kudlow also hailed that Trump admin is “making headway in the negotiations and is making great progress”.
Kudlow also added that negotiators are “working out some of the difficult final points and it’s got to be good, it’s got to be fair and reciprocal, and it has got to be enforceable — that’s an important point”.
Thus it’s not clear what the timing could be on any face to face meeting, but most probably it will be in April and China wants the Presidential summit as a mere “signing ceremony”, not a platform for further bargaining (negotiation) after the fiasco of Trump-Kim summit, which looked underprepared. China does not want to take any such risk which could undermine and damage the image of their President Xi from an embarrassing situation out of Trump’s whims & fancies.
The US market was also boosted by Fed Chair Powell’s patience and hopes of no further rate hikes in 2019. In a weekend Sunday interview, the Fed Chair Powell reiterated the Fed is in no hurry to change interest rates and acknowledged that over the past few months there’s been increasing evidence of the global economy slowing down.
Powell repeated the Fed stance that current interest rates are “appropriate” while inflation is “muted”. He also described the current rate-setting as “roughly neutral”. The Fed is patient regarding policy adjustment and that means “we don’t feel any hurry to change our interest rate policy”. But, it also does not mean that the Fed will be patient for the whole of 2019.
Powell was also worried about the slump in retail sales in December and also growing US auto loans defaults: “We are watching retail sales after a weak December but that there is some evidence of a rebound in January and also some Chinese steps to support their growth. Overall financial conditions are generally healthy and then the stock market valuations mostly at normal long-term levels. But a large number of auto loan defaults are a product of the fact that the number of auto loans is much higher”.
Talking about the US retail sales, Monday data shows that the US core retail sales jumped +0.9% in January from a slump of -2.1% sequentially and higher than the expectations of +0.4%. Although it's positive for the USD and a hawkish bias for the Fed, looking for two more hikes in 2019, the upbeat retail sales in January is a big relief for the market, concerned for the synchronized global as-well-as US contraction. The January retail-sales data boosted the market confidence that the US economy isn’t headed for a soft-landing after a terrible US NFP job addition data for February.
On Monday, the US market was also boosted by Chipmakers that gained on M&A buzz as Nvidia agreed to buy a competitor (Mellanox Technologies for $6.8B), sending the Philadelphia Semiconductor index to its biggest gain in a month; AMD and Micron (NASDAQ:MU) also helped. Apple and Facebook (NASDAQ:FB) were also boosted by renewed analysts’ optimism/upgrade and buzz of an imminent launch of Apple TV streaming service coupled with FB’s changing communication model using a messenger.
The Dow Jones Transportation Average stopped the longest string of drops since 1972, while Defense companies including General Dynamics Corp (NYSE:GD), United Technologies Corp (NYSE:UTX), and Textron Inc (NYSE:TXT). jumped after the US President Trump urged Congress to slash funding for foreign aid, the State Departments and increase spending for the military as-well-as the wall he wants to build on the Mexican border in his 2020 budget.
On Monday, the blue-chip Dow Jones Industrial Average jumped +0.79% to close around 25650.88, almost at the session high of 25661.63; earlier it made a “Boeing low” of 25208.00 in a day of wild trading. The broader S&P 500 (SPX-500) soared +1.47% to close around 2783.30, almost at the session high of 2784.00; earlier it made a low of 2747.61 in a day of volatile trading. The tech-heavy Nasdaq Composite (IXIC) zoomed +2.02% to close around 7558.06, just a tock down from the session high of 7558.23; earlier it made a low of 7442.40 in a day of rollercoaster trading.
On early Tuesday, the US future is now trading almost flat amid lingering Boeing and Brexit uncertainty and some progress of the US-China trade truce, although the March summit between Trump and Xi is now virtually called-off, while China again urged the US to drop the case against the Huawei CFO Meng.
As per the report, the Chinese Vice Premier (chief negotiator) Liu He and his US counterpart the USTR Lighthizer had spoken via phone (on trade issues) Monday. The report further suggested that the two discussed key structural issues in ongoing trade talks and set to start the next steps towards a working arrangement (tentative deal).
As a reminder, China now wary of Trump’s request for Xi to fly to the US to finalize the deal as they fear Xi may be embarrassed by an unpredictable Trump (like in summit with NK’s Kim) or forced into a last-minute concession. On late Monday, the White House spokeswoman Sanders confirmed that the Presidential summit date still hasn’t been finalized, but talks are ongoing. When asked if there’s a date for Trump and Xi to sit down to sign a trade deal, Sanders replied: “Not yet. We’re continuing the negotiation with China”.
Elsewhere, Boeing is facing a lifetime crisis of confidence in its crucial 737 Max plane following the weekend crash in Ethiopia, with Singapore and Australia now joining the global bandwagon to block the best-selling model from their airspace. Indonesia’s Lion Air, one of the biggest customers for the jet, is also considering switching to the Airbus SE’s A320 family amid plans to suspend existing orders it has with the Boeing. Similar steps may be taken by other countries including China.
Although, the US Federal Aviation Administration signaled its confidence in the 737 Max, as there isn’t yet conclusive evidence to link Sunday’s crash with a fatal Lion Air disaster in October, various countries are now taking precautionary steps like outright ban or flying with only an experienced pilot (where aircrafts are in shortage-like in India).
Technical Outlook: SPX-500, DJ-30, NQ-100
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 2815-2800, SPX-500 may fall to 2775/2745-2730*/2700 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 25700*/25500-25300/25100* and 25000/24750-24550/24200 in the near term (under bear case scenario).
Technically, whatever may be the narrative, NQ-100 has to sustain above 7255 for a further rally to 7280/7375-7455*/7550 and 7685/7735*-7850/7925 in the near term (under bullish case scenario).
On the flip side, sustaining below 7235-7135, NQ-100 may fall to 7055*/7000-6950/6915 and 6870/6825*-6790/6720 in the near term (under bear case scenario).
US 500 US 30 US Tech 100 Boeing