Dow plummeted over 400 points early Friday on the concern of synchronized global contraction after terrible manufacturing PMI data from Germany as-well-as soft PMI from the US. The risk-on sentiment was also under stress on growing European political jitters including Brexit and rise of Eurosceptic sentiment across the Eurozone (Netherlands, Hungary, Italy, Spain, France and even in Germany) coupled with lingering Trump trade war uncertainty and resultant global slowdown. Subdued report card from Nike (NYSE:NKE) and cancellation of Boeing-737 MAX orders by Indonesia also dragged the market.
It now seems that Europe’s manufacturing and export powerhouse Germany is more affected than China in the trade duet between the US-China. The European economy is also affected by Trump’s auto trade war narrative. The manufacturing sector in Europe’s largest economy, Germany plunged into further contraction in March.
On Friday, flash data shows that the German manufacturing PMI dropped to 44.7 in March from prior 47.6, lower than the expectations of 48.0 and at the lowest level in last 7-years (since 2012). The manufacturing sector in Europe’s largest economy Germany is in contraction (below the boom/bust line of 50.0) since January’19. Overall, the Eurozone manufacturing PMI also dropped to 47.6 in March from prior 49.3, lower than the estimate of 49.5 and well in contraction since February, the lowest since 2013.
Markit said on the Eurozone PMI: "Most worrying is the plight of the manufacturing sector, which is now in its deepest downturn since 2013 as trade flows contracted at the sharpest rate since the debt crisis-ridden days of 2012. Forward-looking indicators such as business optimism and backlogs of work suggest that growth could be even weaker in the second quarter”.
The German as-well-as the Eurozone service PMI was upbeat and hovering around 54.9 and 52.7 respectively, as Germany and some Eurozone states/countries are benefitting from the shift of location by some big financial or service companies from the UK as a result of Brexit uncertainty.
But the market is concerned more about export-heavy Eurozone manufacturing. The yield on the German 10-year Bund briefly turned negative in the wake of the disappointing data coupled similar negative JGB yield in Japan and lower US bond yields/flattening, all of which are indicating an imminent economic slowdown. And add to it the deluge of subdued guidance from various US MNCs and Fed’s subdued forecast of economic growth (GDP) in 2019, the market is worried about a synchronized global contraction.
On Friday, the US manufacturing PMI for March also flashed as soft as it edged down to 52.5 from prior 53.0, lower than the expectations of 53.5. The US service PMI for March also dropped to 54.8 from prior 56.00, lower than the expectations of 55.7. Although the US PMI is still considerably above the boom/bust line of 50.0, the slowdown may be visible. But the US existing home sales jumped +11.8% in February sequentially from the prior slump of -1.4% and higher than the estimate of +2.2% growth. The sudden fall in the US mortgage rate may have helped in February.
Although lower borrowing costs would be beneficial for the US/global economy and corporate earnings, the likely fall in demand/revenue because of the synchronized global contraction (China/EU/US slowdown) is negative for the corporate earnings and the stock market.
The risk-on sentiment was also affected after the US Treasury Department move to sanction two Chinese shipping companies for allegedly helping North Korea evade prohibitions on its nuke program. With the US Treasury Secretary Mnuchin and the USTR Lighthizer set to travel China next week for the 9th round of almost marathon trade talks with hopes to move forward, the decision to sanction two Chinese companies could complicate trade negotiations. Reports have said the talks have started to get bogged down by resistance from China on how the US would ensure deal enforcement with China.
The suspense of trade deal between the US and China continues, with the US trade negotiators playing down the chances of a breakthrough soon. After Lighthizer and Mnuchin’s travel to Beijing for meetings at the end of next week, the Chinese Vice Premier Liu He is expected in Washington in April for the 10th round. The current goal is to reach an accord after Liu’s trip (at 10th round), although Trump has said he wants a deal that can be ‘enforced’, not one that’s ‘quick’.
On Friday, Trump again sounded cautiously optimistic on China trade deal potential. Trump said the trade deal with China coming along, will probably happen and is ‘getting very close’, but tariffs (additional 10%) on Chinese goods will stay in place for a (long) period of time---there is no snag in trade negotiations.
Although Trump’s 10% China tariffs and China’s equivalent Yuan devaluation of 10% is making the US-China trade skirmish into “Goldilocks” types of trade war (not too hot, not too cold), it’s sentimentally negative and the US goods exports to China is suffering most rather than China’s export to the US.
But China may now report current account deficit (CAD) for the 1st time since several years and may now import capitals rather than exporting it. Although, a dovish Fed, ECB, and BOJ will ensure no lack of “helicopter money”, the shift of China may be negative for US Treasuries as China is the biggest investor of US debt. China is also transforming into a consumption economy rather than being only manufacturing and all these tectonic shifts mean that China may not use its FX reserve actively to control its currency, which means more trade war rhetorics from Trump.
On Friday, Trump also confirmed that he will nominate Stephen Moore, a known policy dove and Trump supporter (election campaigning cheerleader) for the Fed board post. Trump also said he has ordered the withdrawal of additional North-Korea related sanctions recently announced by the US Treasury (on some Chinese companies). Dow got some boost after Trump’s NK sanction withdrawal comments, because it may help trade talks with China next week. Trump also said he doesn’t like the concept of breaking up big tech companies like Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL), and Twitter.
On Friday, in a series of tweets, Trump said:
“It is my pleasure to announce that @StephenMoore, a very respected Economist, will be nominated to serve on the Fed Board. I have known Steve for a long time – and have no doubt he will be an outstanding choice!”
“It was announced today by the U.S. Treasury that additional large scale Sanctions would be added to those already existing Sanctions on North Korea. I have today ordered the withdrawal of those additional Sanctions!”
On Friday, the White House said: “Trump likes North Korean leader Kim and he does not think these sanctions will be necessary”. The White House also confirmed that the deputy economic adviser and trade negotiator Clete Willems to be succeeded by Kelly Ann Shaw.
Meanwhile, Boeing (NYSE:BA) also tumbled around -2.5% on Friday to a session low of 363.43 after Garuda Indonesia, the flag carrier for Indonesia, said it was seeking to cancel an order for 49 Boeing 737 MAX jets, saying “passengers have lost confidence in the aircraft following two deadly crashes in recent months”. The move makes Garuda the first airline to publicly confirm plans to cancel a 737 MAX order, worth millions of dollars. The Indonesian airlines' decision to cancel was "in line with the desires of consumers who have lost confidence in the Boeing 737 MAX 8”.
As per reports, the Indonesian airline sent a letter to the head of Boeing's commercial plane division on 14th March, "to say that we want to cancel”, while Boeing representatives were planning to meet with Garuda airlines in Jakarta on 28th March "for further discussions”.
On mid-Friday, the US market was dragged by banks & financials (lower/inverted US bond yields) most and except defensive sectors like utilities and consumer staples (high dividend paying bond proxies), all were in red including energies as oil slumped on the sudden concern of synchronized global contraction. Netflix (NASDAQ:NFLX) was under stress on Apple’s launch of video streaming services.
Technical Outlook: SPX-500, DJ-30, NQ-100
Technically, whatever may be the narrative, SPX-500 has to sustain over 2865 for a further rally to 2900*/2925 and 2950*/2985-3020/3050 in the near term (under bullish case scenario).
On the flip side, sustaining below 2855/2825-2810*, 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 7570-7550, NQ-100 may fall to 7450/7360*-7245/7190* and 7090/7050-7000/6930* in the near term (under bear case scenario).
US 30
Dow jumped Thursday on tech optimism despite dragged by banks and higher USD:
The US stock market jumped Thursday on tech optimism led by Apple (NASDAQ:AAPL) and Micron (NASDAQ:MU), 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 (NASDAQ:BIIB) 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 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. But the overall US economic data was soft in the last few months. The Citi Economic Surprise Index recently hit its lowest level since August 2017 and is still deep in negative territory.
The blue-chip Dow Jones Industrial Average (DJ-30) jumped +0.85% to close around 25963.77, near the session high of 26009.40; earlier it made an opening session low of 25659.88 in a day dominated by bulls. The broader S&P 500 (SPX-500) soared +1.09% to close around 2854.88, almost at the session high of 2860.31; earlier it made opening minutes low of 2817.38 in a day of green. The tech-heavy Nasdaq Composite (IXIC) zoomed +1.42% to close around 7838.96, near the session high of 7850.10; earlier it made an opening tick low of 7705.43 as the market never looked behind after Thursday opening.
Overall, the US market was helped by techs (Apple, Microsoft (NASDAQ:MSFT)), Semiconductors (Micron, AMD), interest rate sensitive real estate and consumer durables while dragged by banks & financials (JPM), which was the only sector in red on Thursday among 11-major SPX-500 sectors.
US 500 US Tech 100 Nike
On Friday, Nike also dragged the US market after the athletic apparel giant posted weaker-than-expected Q3 sales in North America and issued a guidance warning, noted that a stronger USD could affect the bottom line in the coming quarters. Nike’s adjusted EPS of $0.68 topped analysts' forecasts by 3 cents, while a currency-neutral gain of 11% in revenue to $9.6B met forecasts. However, $3.81B in sales in Nike's key North American market missed expectations partly due to product launch timing issues, despite there is a robust demand for its products.
Nike's Q4 and FY20 outlooks were solid as the company continues to win back market share from German rival Adidas (DE:ADSGN) in its home (U.S.) market and capitalizes on its strength in basketball shoe sales, but a stronger USD and planned increases in expenditures could erode earnings potential.
As a pointer, Nike's quarterly EBITDA margin from last year to 45.1%, thanks to higher average selling prices, but was partly offset by a rise in selling and administrative expenses, which swelled by 12% to $3.1 billion as the company continues to expand its digital platforms, supply chain improvements and marketing campaigns.
Nike CFO Champion said on Tuesday in a post-earnings concall: "There were some timing impacts related to our NBA business and the launch of certain products year over year. There are always timing impacts in terms of product launches. So yes, nothing in terms of a turn or change in consumer demand--in fact, consumer demand for our apparel in North America is very strong. Frankly, to some extent, it puts pressure on supply, but that is a great point of pressure to have. We've got really strong demand for our apparel in North America”.
Nike’s subdued guidance reflects many US MNCs with common headwinds of China/global slowdown and string USD, all are the byproduct of Trump’s bellicose trade policies. Nike plunged almost -6% on Friday.