The European market (Stoxx-600) closed around 354.26 Wednesday, stumbled by almost -1.22% on lingering Trump trade war tensions despite Dow future rebounds more than 100 points after Trump’s damage control tweets in a holiday-thinned market. As the US bond market was closed, the market was not sure about the trajectory of US bond yield curve inversion and thus the overall risk-on optimism was quite limited despite Trump’s trade truce optimism. The European market was also under stress on the concern of an economic slowdown amid subdued retail sales and business growth data.
On Wednesday, the US market was closed for a day of mourning for former President George H.W. Bush, who died on Friday. But the US equity future as-well-as global risk-on sentiment got some boost after the “Tariff Man” Trump tweets “very strong signals from China-I believe in Xi” and Trump also sees a China trade deal coming "either now or into the future” in a damage control mission after Dow plummeted almost 800 points Tuesday.
This came after Trump branded himself as a “Tariff Man” and also tweeted that the US will either have a real deal with China or no deal at all and that the US will levy major tariffs against imports of Chinese products if a deal is not made with China. As a reminder, the US market crumbled almost -3% late Tuesday on the increasing concern of an economic slowdown amid bond yield curve inversion and US-China trade truce uncertainty as Trump called himself a “Tariff Man” and vowed to go for higher tariffs if China does not budge.
Europe has followed suit Wednesday from their US and Asia-Pacific counterparts to trade lower across the board as the trade-inspired optimism seen at the start of the week continues to dissipate. China’s MOFCOM declared the US-China trade meeting as successful, although were said to be puzzled and irritated by the Trump administration's triumphant rhetoric.
The European market followed the overnight terrible cues from the Wall Street and succumbed Wednesday on US-China trade war/truce uncertainty and increasing concern of an economic slowdown as US bond yield curve partially inverts. As a result, core sectors such as construction, materials, and miners sensitive to economic growth tumbled on fears of an imminent recession. Trade-sensitive industrials also plunged.
The market is also now discounting lower EPS for 2019 amid slowing economic growth, higher borrowing costs, lingering Trump trade war jitters coupled with cross-currency headwinds and a surge in raw material costs. Banks and financials tumbled as the German Bund yield nosedived on flow to the safety of bonds as equities plunged and as the translantic spread soared. But fall in Italian BTP yield on hopes of a budget truce also limits the overall damage to the banking sector.
Techs and chipmakers crumbled on Trump trade war tensions. Energies helped on higher oil amid ongoing jawboning by OPEC+ regarding the quantity and time frame of the highly expected production cut in Friday’s meeting. Automakers fell but off the low and outperformed the overall market on hopes of an auto trade war truce after relatively positive outcome from a meeting of German auto heads with Trump admin at the White House.
In the auto meeting, the US President Trump pressed EU/German automakers executives to increase investments in the US, something the executives said they planned to do but wouldn't be able to if the Trump admin went ahead with threatened tariffs. Meanwhile, the White House CEA/NIC Kudlow, who was present in the meeting, said he did not think that car tariffs were imminent.
On Italian budget drama, EU’s budget commissioner Oettinger said: “We can’t accept a draft budget from Italy which would violate all stability criteria. Italy’s budget plans as a whole are dangerous for Italy and Eurozone. Italy’s problems are particularly dangerous due to country’s (high) debt level and partial retreats from earlier reforms. We expect from Italy a draft budget that matches promises and does not include a deficit of 2.4%. I hope Italy presents a new budget plan today (Wednesday) and the new Italy plan must comply with European Union rules”.
But Oettinger also sounded tough and indicated that even bring down deficit target from the current plan’s 2.4% to 2.2% of GDP, that “would be against all the commitments”. Meanwhile, another report suggests that Italy may send the revised version of the 2019 budget to the EU next week (Tuesday).
Italy’s PM Conte said new budget proposals will include measures for boosting investment, and we could tweak budget without backtracking. It seems that despite various rumors, Italy hasn’t submitted a revised Draft Budget Plan yet. The Italian Prime Minister Conte said that “if I have the chance to reduce the economic impact of some measures I’m here. I’m the one who is entitled to speak with the European Commission … and I never halted discussions. Right now if I can recover some funds, tweak the final figure, change a few little things, it doesn’t mean I’m backtracking”.
As per the report, Italy may consider reducing citizens' income costs in budget revision and could save up to €2 billion on citizens' income. But the overall Italian sentiment was also affected after a report that Italian Economy Minister Tria may resign over a budget rift with the PM Conte, which Conte denied later. Italy’s FTSE MIB-40 outperformed the overall European market on hopes of a budget truce and edged down -0.13%, helped by banks and financials.
France’s CAC-40 plunged -1.36% amid lingering “yellow vests” protests despite the government dials back the controversial fuel tax. The market is concerned about growing Euroskeptics movement across France and other Eurozone areas. On Wednesday, France was dragged by techs, consumer services, banks & financials.
Spain’s IBEX-35 slumped -0.55%, dragged by real estate, building & construction, telecoms, IT/techs, banks & financials, while helped by airlines amid a slump in ATF prices as oil corrected by almost 33% in the last two months.
Germany 30
Germany’s export and auto heavy DAX-30 tumbled almost -1.19% and closed at 11200.24 on Wednesday, dragged by techs, banks & financials. On early Thursday, DAX-30 future is currently trading around 11025, plunged by almost -1.45% amid subdued global cues on fear of fresh US-China geopolitical/trade tensions as Canada arrested Huawei CFO at the US request.
Pivot: 10995 Support: 10850 10700 10550Resistance: 11100 11200 11295 Scenario 1: STRONG ABOVE 11025 Scenario 2: WEAK BELOW 10995 Comment: NEAR TERM RANGE: 10500/10995-11375/11625
The UK’s FTSE-100 slumped -1.44% Wednesday on the never-ending Brexit saga and increasing uncertainty about any types of Brexit or no-Brexit at all. The UK is most probably heading for a 2nd Brexit referendum or a fresh general election as it now looks almost impossible for Theresa May to pass her Brexit deal, even if that looks like the Brexit in “name only”.
The UK market came under stress on subdued global cues amid slowing economic growth and lingering trade war tensions coupled with a report that showed uncertainty about Brexit left the British economy at risk of contracting. But the UK homebuilders were also upbeat on analysts’ upgrade as a potential major beneficiary on hopes of a Brexit deal that may be passed in the British Parliament.
Fashion retailer Joules surged on Wednesday after announcing it would set up a distribution facility in the EU and bring the inventory of its 2019 spring-summer collection into the UK earlier than usual as part of its Brexit contingency plan. Lansdown plunged after an analyst downgraded the stock to underweight, noting that a weaker UK economic outlook is likely to hit 2019 revenue flows coupled with another headwind of weaker stockbroking fees.
British biotech company Shire surged after Japan’s Takeda Pharmaceutical approved a $59 billion takeover, the biggest overseas acquisition by a Japanese company. The British embattled travel operator Thomas Cook soared over 51% on a report that it would not need to issue new equity to fund expansion; i.e. earlier fear of an equity dilution eased. The FTSE-100 future is currently trading around 6865, slumped by almost -0.75%.
Pivot: 6800 Support: 6760 6630 6500Resistance: 6900 6995 7085 Scenario 1: STRONG ABOVE 6825-6850 Scenario 2: WEAK BELOW 6800 Comment: NEAR TERM RANGE: 6500/6800-7085/7175
As a reminder, on Tuesday, the UK PM Theresa May suffered embarrassing defeats at the start of five days of debate that will lead to a parliamentary vote on 11thDec on her proposed Brexit deal. Meanwhile, a European Court of Justice (ECJ) AJ have an opinion that Britain could unilaterally revoke Brexit (Article-50) if it wanted, but Theresa May has vehemently denied that option, although the market is now slowly discounting a no-Brexit probability amid all these UK/EU political dramas.
GBPUSD is currently trading around 1.2727, edged down by -0.05% and so far in December, GBPUSD is down by only -0.20% to 1.2664 at fresh 3-months low after it lost -2.15% in the last two months. The only support GBP is getting now an increasing probability of no-Brexit despite Theresa May’s apparent disapproval. But even May was a known anti-Brexiter in the 2016 Brexit referendum campaigning. Theresa May is now pursuing an orderly Brexit as an “obedient public servant” as per the Brexit referendum verdict.
Pivot: 1.26595 Support: 1.26 1.258 1.249Resistance: 1.277 1.28 1.285 Scenario 1: STRONG ABOVE 1.27700 Scenario 2: WEAK BELOW 1.27600-1.27400 Comment: NEAR TERM RANGE:1.20700/1.26595-1.27700/1.28500
The SPX-500 future is now trading around 2669, plunged by almost -1.20% on fear of fresh US-China geopolitical/trade tensions as Canada arrested Huawei CFO at the US request. As per the report, the CFO, Meng Wanzhou, was arrested on Saturday in Canada at the request of the US. The arrest of Meng, a daughter of the company’s founder, is likely to escalate tensions between the US and China over technology and trade truce issues, just as the two countries appeared to have reached a trade ceasefire.
It’s also very strange about Trump’s silence on the issue despite that fact that the arrest occurred on the same day with his dinner meeting with China’s president Xi. As a result, the SPX-500 made a panic low of 2650.25, but it apparently stabilized from panic selling after the Chinese embassy in Canada said China has complained to the US and Canada and asked them to "rectify wrongdoings" and free the Huawei CFO. The embassy said it will closely monitoring the development of the matter and take all actions to protect the legitimate interests of Chinese citizens.
In a statement on its embassy, China says that it firmly opposes and strongly protests Canada’s arrest of a Chinese citizen who didn’t violate any US, Canada laws, adding that the arrest upon the US’s request severely violates human rights.
The Embassy of China in Canada said that it resolutely opposes Meng's arrest and demands her immediate release: "The Canadian police, at the request of the United States, arrested a Chinese citizen who had not violated any U.S. or Canadian law. China has already made solemn representations to the United States and Canada, demanding they immediately correct their wrong behavior and restore Ms. Meng Wanzhou's freedom”.
Meanwhile, China’s chief executive of the telecom industry said: “Meng has become a hostage in the China-US trade war. The US and Canada have no right to detain a Chinese citizen without providing any legal evidence”.
The Chinese tech/telecom company Huawei, in a statement, said the arrest was made on behalf of the US, so Meng could be extradited to “face unspecified charges” in the Eastern District of New York: “The company has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms. Meng. The company believes the Canadian and the US legal systems will ultimately reach a just conclusion. Huawei complies with all applicable laws and regulations where it operates, including applicable export control and sanction laws and regulations of the UN, US, and EU”.
The US DOJ (Department of Justice) said: "Wanzhou Meng was arrested in Vancouver on December 1. She is sought for extradition by the United States, and a bail hearing has been set for Friday. As there is a publication ban in effect, we cannot provide any further detail at this time. The ban was sought by Ms. Meng”.
The market is concerned about the durability of the US-China temporary trade truce and if that arrest is linked with tech theft then that translates worst for the US-China relations and the timing is also very worst. On one hand, Trump is stating that trade talks are going really well with China and then on the other, the Trump admin is trying to prosecute the CFO of one of its biggest Chinese tech firms.
As per the report, the arrest is on suspicion that Meng violated the US sanctions against Iran by selling telecommunications equipment. There is report alleging closer ties to between Huawei and a company that sold HP equipment in Iran. As a reminder, Huawei has frequently been the focus of US intelligence for trying to gain access to the 5G network. The company is the world's second-largest maker of telecommunications equipment.
There is also another report that the hackers behind the breach at Marriott International hotel left clues suggesting they were working for the Chinese government intelligence-gathering operation. The report suggests that the private investigators looking into the data breach have found hacking tools, techniques, and procedures previously used in attacks attributed to known Chinese hackers.
Pivot: 2735 Support: 2645 2625 2600Resistance: 2765 2780 2815 Scenario 1: STRONG ABOVE 2735 Scenario 2: WEAK BELOW 2725-2695/2680 Comment: NEAR TERM RANGE:2600-2815
In commodities, crude oil (WTI) is currently trading around 52.28, plunged by almost -1.17% on the concern of US-China tensions after the Huawei CFO arrest by US/Canada. Oil was also under stress on various “floating balloons” being floated by OPEC+ regarding the quantity and timing of production cuts, which varies from 1.00/1.40 mbpd to 0.80 mbpd and only 6-months duration instead of the perpetual narrative. Some Russian producers are also raising some practical issues like winter related maintenance and production cut difficulties at this time.