by Pinchas Cohen
Key Events
Yesterday, news broke that the much vaunted corporate tax cuts President Donald Trump has been promising might be phased in gradually rather than accomplished all at once. Should that occur, some of the promised economic benefits from the cuts could be delayed, possibly for years. US major indices including the S&P 500, Dow and Russell 2000 all fell while Treasuries gained.
Interestingly, markets appeared to be largely unaffected by yesterday's other big US news, the 12-count indictments handed out to former Trump campaign manager Paul Manafort and an associate in addition to a guilty plea by former campaign foreign policy advisor George Papadopoulos. The variety of charges included money laundering, making false statements and conspiracy. These were the first allegations issued by Special Counsel Robert Mueller as part of his team's investigation into whether the Trump campaign, and possibly the President himself, helped facilitate what appears to be Russian meddling in the 2016 campaign.
Global Financial Affairs
This morning, Asian markets fluctuated. China’s Manufacturing PMI release disappointed, possibly a result of the Chinese government recently coming down harder on polluting industries. It was down from a five-year high of 52.4 in September to 51.6 in October.
The result has compounded mounting concerns of ever restrictive regulations on leveraging from Beijing, which began toward the end of last year. Since then the Chinese economy has expanded despite these fears, which also includes property risk.
However, risk still exists. Australian news reported that rapidly cooling house prices in Sydney and the sudden withdrawal of Chinese investors from that country's property market may lead the RBA to cut interest rates, according to investment bank Credit Suisse. As well, China has been the economic engine that pulled the west out of the financial crisis abyss. Its fast-paced growth has stood the test of time.
Along with Europe, China is currently the leader of global economic growth. The latest PMI reading also comes as manufacturing gauges in Europe, the US and Japan earlier this month all added to evidence in support of global economic growth.
Japanese stocks ended the day slightly lower after the Bank of Japan maintained its key policy rate and target for the yield on 10-year government bonds. Concerns remain on the inflation outlook.
Stocks in Europe struggled for traction this morning and bonds edged higher before data on economic growth and inflation that may provide additional clues on the health of the eurozone’s economy.
The dollar traded sideways as investors continue to assess developments on US tax reform.
This morning's European data show that the unemployment rate inched lower in September, while the regional economy expanded for an 18th consecutive quarter in the three months through September, though at a slightly slower pace. Consumer inflation, however, remained sticky, complicating the European Central Bank’s task as it considers its tightening policy.
American tax reform and the outlook for monetary policy remain dominant market themes. The phase-in plan for corporate tax cuts mentioned above has been considered, but may not yet be final, said a member of the House Ways and Means Committee, who asked not to be named because the discussions are private.
Since small companies are arguably the biggest beneficiaries of tax reform, the news that real reform could be farther away than initially expected hits them the hardest. No surprise then that the iShares Russell 2000 ETF (NYSE:IWM), fell 1.05 percent yesterday.
On July 27, the Russel 2000 hit a record in its biggest daily percentage gain since June. The index was the strongest performer of the day, having gained 1.5 percent. Second place went to the NASDAQ Composite with 1.1 percent. The S&P 500 gained only 0.32 percent that day, with the Dow trailing, down 0.3 percent.
The reasons the small cap index outperformed the S&P benchmark 2:1, 4 percent versus 2 percent, from then until till October 5 are: (1) the rising US dollar hurt the profitability of multinational large caps, and (2) small companies were expected to benefit more from the tax reform plan Congressional Republicans had just unveiled.
However, the very bullish hammer of October 25 supported the price, suggesting the potential continuation pattern that has developed since the end of the 4 percent move, which remains intact. An upside breakout would suggest a repeated 4 percent sharp move. Alternatively, a close below the 147.22 hammer support would signal a decline.
One of yesterday's biggest winners was Apple (NASDAQ:AAPL). Its shares rose 2.33 percent for a total two day rally just shy of 6 percent, on signs of strong demand for its latest phones, buoying the NASDAQ 100. The company headlines another week of major earnings, with its report due Thursday.
Yesterday’s jump in Apple shares reached a record, confirming the uptrend. However, such sharp moves are often followed by corrections. The stock is nearing its rising channel-top, which suggests consolidation is imminent.
The NASDAQ 100 on the other hand, which was boosted by Apple yesterday, crossed above the rising channel-top, suggesting a sharper rally to follow. However, the penetration didn’t even satisfy the 1-percent aggressive filter of avoiding bull-traps, and the candle’s high upper shadow suggests the price found considerable selling resistance. It might be better to wait and buy on a dip.
The New York Times reported that Jerome Powell will be chosen to helm the Fed, in line with expectations from betting markets.
Treasuries rose and the euro slipped.
WTI crude fell after rising to a six month high on Monday.
Up Ahead
- The Fed's next rate decision will be announced on Wednesday. Economists are expecting policy makers to hold rates for now but to increase them at the December meeting.
- The always anticipated US October Nonfarm Payrolls report comes out Friday.
- Trump starts an 11-day trip to Asia on Friday, his first as president. Trade and security issues—particularly the situation with North Korea—will probably be in focus.
- Consensus expects the Bank of England to announce a rate hike on Thursday, which would be the first in a decade.
- The slew of major tech company Q3 earnings releases will culminate with Apple announcing results on Thursday.
Market Moves
Stocks
- Japan’s TOPIX declined 0.3 percent at the close of trading in Tokyo, while the Nikkei 225 was flat. Softbank (T:9984) declined 4.6 percent. Talks with Sprint (NYSE:S), whose shares plunged yesterday during US trading, have hit a serious snag over valuation, according to people familiar with the matter.
- Australia’s S&P/ASX 200 Index fell 0.2 percent.
- The KOSPI in Seoul climbed 0.9 percent.
- Hong Kong’s Hang Seng Index was steady while the Shanghai Composite was up 0.1 percent.
- TheMSCI Asia Pacific Index rose 0.1 percent. It's on track for a 4.4 percent advance in October. The index has advanced every month this year, the longest streak of monthly gains since 2007.
- The Stoxx Europe 600 Index rose less than 0.05 percent as of 8:21 London time (4:21 EDT).
- The U.K.’s FTSE 100 jumped 0.1 percent.
- S&P 500 Futures increased 0.1 percent.
Currencies
- The Dollar Index rose 0.12 percent to 94.57, paring about a quarter of its losses from yesterday’s 0.4 percent slide.
- The Japanese yen increased 0.1 percent to 113.10 per dollar, the strongest in more than a week.
- The euro declined 0.1 percent to $1.1642.
- Sterling climbed 0.1 percent to $1.3215.
Bonds
- The yield on 10-year Treasuries declined one basis point to 2.36 percent, the lowest in more than a week.
- Germany’s 10-year yield fell less than one basis point to 0.37 percent, the lowest in seven weeks.
- Britain’s 10-year yield decreased one basis point to 1.335 percent, the lowest in more than a week.
Commodities
- West Texas Intermediate crude dipped 0.2 percent to $54.05 a barrel.
- Gold rose less than 0.05 percent to $1,276.77 an ounce.