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On 12 June 2019 - US stocks off slightly as US-China trade worries weigh on investors

Anne D Picker

Anne D Picker - Econoday

US CPI feeds rate cut expectations but traders are cautious.

US markets

US shares slipped Wednesday as markets reacted to President Trump’s comment that he was holding up a trade accord until China accepts unspecified terms, and his threat to proceed with more tariffs if there is no trade deal at the G20 meeting.

News that police fired tear-gas at protesters in Hong Kong added to the risk-off tone, along with more soft data, and wariness ahead of the Federal Open Market Committee meeting next week.

On the plus side, a soft US CPI report bolstered expectations that low inflation would allow the Fed to proceed with two or three rate cuts this year, which are now priced into markets. Caution has crept in ahead of next week’s FOMC meeting, as traders await signs the Fed will deliver on market expectations, at least starting with the July FOMC meeting.

The Dow industrials fell 0.2 percent; the S&P 500 declined by 0.2 percent, and the NASDAQ slipped 0.4 percent.

Energy, banks, and semiconductors were among the weakest performers on the trade news, and on the related fear of a global slowdown. Energy shares reflected oil price declines Wednesday, partly in response to bearish US oil stocks data.

Banks were hit by expectations of falling interest rates, which cuts their interest rate margin. Chipmakers and tech firms were hit by the US-China trade tensions, and wider worry about slowing Chinese and global demand.

Notable losers included Exxon Mobil, off 1.1 percent, and oil driller Apache, down 2.9 percent. Among banks, Citigroup fell 1.6 percent and Bank America was down 1.0 percent. Chipmaker Micron was down 1.8 percent, and Applied Materials was down 5.2 percent. 

Facebook was off 1.7 percent on news the firm uncovered email fingering founder Mark Zuckerberg in the company’s dubious privacy practices, which have spurred an investigation by the Federal Trade Commission.

Economic data showed US consumer price pressures are fading, as the ex-food ex-energy core CPI rate missed expectations with only a 0.1 percent gain in May. The year-on-year rate edged 1 tenth lower to 2.0 percent, which also misses expectations. Overall prices rose an as-expected 0.1 percent though the annual rate fell 2 tenths and at 1.8 percent is moving away from the Federal Reserve's target.

These data reflect observations at 4:00 PM US ET: Dated Brent spot crude was down US$2.51 at US$59.81 while gold was up US$6.10 at $1,333.10. The US dollar was higher against most major currencies. The yield on the US Treasury 30-year bond was unchanged at 2.62 percent while the yield on the 10-year note was down 2 basis points at 2.12 percent.

European markets

European shares weakened as US-China trade worries resumed after more tough talk from President Trump. Ongoing protests in Hong Kong contributed to negative tone, with Hong Kong’s Hang Seng index off 1.7 percent.

Markets also appeared tentative as traders need confirmation the Fed will proceed with rate cuts now being priced in, if not at the FOMC meeting next week, then in July and later.

The European STOXX 600 fell 0.3 percent, the German DAX was off 0.4 percent, the French CAC fell 0.6 percent, and the UK FTSE 100 was down 0.4 percent.  Italy’s FTSE-MIB fell 0.7 percent on escalating tensions between Italy’s populist government and the European Union over Italy’s debt and deficit levels.

European chipmakers, a sector with heavy exposure to China, fell, with Infineon down 0.8 percent, and STMicroelectronics down 1.6 percent. Banks suffered, with Deutsche Bank off 0.7 percent, and Barclays down 1.4 percent. British American Tobacco dropped 4 percent, making it the worst performer on the London exchange, after reporting gloomy sales and market share results.

Energy shares also suffered as oil prices dropped after uninspiring Chinese economic data, including a soft wholesale price report, and sluggish growth in yuan lending. The data fed the narrative of soft Chinese demand. BP was down 2.9 percent, and Royal Dutch Shell off 1.1 percent.

On the positive side, media firm Axel Springer surged 12 percent on news of the terms of its buyout by KKR -- at a hefty premium to its current price.

Asia Pacific Markets

Most Asian markets closed lower Wednesday, following the lead set by US stocks Tuesday. Investor sentiment was again impacted by uncertainty about US-China trade tensions after President Trump said any trade deal would be held up unless China agreed to additional but unspecified terms. The Shanghai Composite index fell 0.6 percent on the day, while Japan’s Nikkei and Topix indices fell 0.4 and 0.5 percent respectively. Hong Kong’s Hang Seng index underperformed, closing down 1.7 percent as protests intensified after lawmakers postponed debate on government plans to allow extraditions to mainland China. Australia’s All Ordinaries index closed up 0.1 percent on the day, with mining stocks boosted by an increase in global iron ore prices.

Chinese data published Wednesday showed slightly stronger consumer inflation and weaker producer inflation. Headline CPI rose 2.7 percent on the year in May, up from 2.5 percent in April. This is the third consecutive increase in headline inflation and takes it to its highest level since February 2018, with strong gains in fruit and pork prices pushing up food inflation from 6.1 percent to 7.7 percent. Non-food inflation was little changed, easing from 1.7 percent to 1.6 percent. Producer price inflation fell from 0.9 percent in April to 0.6 percent in May, mainly reflecting smaller increase in prices of production material and energy prices.

Japan's private sector machinery orders (excluding volatile items) rose 5.2 percent on the month (seasonally adjusted) in April after increasing 3.8 percent in March. The headline increase was driven by a strong rebound in manufacturing orders, up 16.3 percent on the month in April after falling 11.4 percent in March. Non-manufacturing orders posted weaker growth, up 1.2 percent on the month after increasing 13.4 percent previously. After this solid start to the quarter, officials expect orders to rebound from a drop of 3.2 percent on the quarter in the three months to March to an increase of 15.7 percent in the three months to June.

India's consumer price index increased by 3.05 percent on the year in May, up from 2.92 percent in April but still well below the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent. Industrial production rose 3.4 percent on the year in April, up strongly from 0.1 percent in March, mainly reflecting stronger growth in manufacturing output. PMI survey data, in contrast, indicated that conditions in the Indian manufacturing sector weakened in April before rebounding in May.

Looking forward

Thursday will see Australian labor data and the Japanese tertiary index. From Europe: German CPI, Swiss producer prices, Italian unemployment, the Swiss National Bank monetary policy statement, and Eurozone industrial production. In the US: weekly jobless claims, import/export prices, and the EIA natural gas report.

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Data Source — Haver Analytics




Note: all releases are listed in local time.

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