CFD Markets News and Forecasts — 23-05-2019

Major US stock indexes have fallen markedly, as investors sold off shares of technological, industrial and energy companies, fearing that the growing trade war between the United States and China will have a negative impact on the global economy.

Beijing said that Washington needs to correct its “wrong actions” so that trade negotiations continue after the United States blacklisted Huawei Technology Co Ltd last week.

Although the Trump administration decided to temporarily relax the restrictions imposed on the Chinese telecommunications equipment manufacturer, tensions rose again after Wednesday’s news that the United States was considering imposing sanctions on Chinese developer and manufacturer of video surveillance systems Hikvision.

Investors worry that the duties imposed on each other and other restrictions of the two largest economies in the world will inhibit global growth, especially in the rapidly developing technology sector.

In addition, the trade war affected the American economy, which caused investors to buy treasury bonds (the basic yield of 10-year US Treasury bonds fell to its lowest level since December 7, 2017).

The US statistics was also in focus. According to preliminary data from the IHS Markit, growth in manufacturing activity in the US slowed down in May and reached about a 10-year low, and new orders fell for the first time since August 2009. The index of business activity in the US manufacturing sector fell in May to 50.6 from 52.6 in April, marking the lowest level since September 2009. Economists had forecast a slight decline to 52.5.

It is also worth noting that the data on sales of new housing in the United States showed a greater decline than expected in April. According to a report by the Ministry of Commerce, sales of new homes fell by 6.9% to an annual level of 673,000, after rising by 8.1% in March, to a revised upward index of 723,000. Economists had expected sales of new homes to fall by about 2.5% to 675,000 from 692,000 that were originally reported in the previous month.

Almost all DOW components are in the red (26 out of 30). Outsider were United Technologies Corp. (UTX; -3.61%). The growth leader were the shares of The Home Depot (HD; + 1.81%).

Almost all sectors of the S & P finished trading in the red. The largest decline was in the raw materials sector (-2.5%). Only the utility sector grew (+ 0.3%).

At the time of closing:

Dow 25,490.47  -286.14 -1.11%

S & P 500 2,822.24 -34.03 -1.19%

Nasdaq 100 7,628.28 -122.56 -1.58%

Peter Vanden Houte, chief eurozone economist at ING, notes that there were few surprises in the minutes of the European Central Bank's April Governing Council meeting with the central bank pretty much remaining in wait-and-see mode.

1. The members of the Council acknowledged that there is a more protracted soft patch, but they believe a more solid growth rate in the second half of the year is still to be expected. That said, the risks surrounding the growth outlook remained tilted to the downside.
2. Underlying inflation remains muted and inflation expectations have declined. However, the Governing Council still thinks that stronger wage growth should lead to higher inflation and that there is still no sign of inflation expectations becoming unanchored.
3. Cost efficiency, excess capacity and the need for consolidation were seen as the reasons for low bank profitability. While further analysis was deemed warranted about the impact of persistently low and negative interest rates on the banking sector, policymakers still believe that the negative deposit rate has contributed to increased lending volumes.
4. Members agreed that the Governing Council should also consider in its regular assessment whether the preservation of the favourable implications of negative interest rates for the economy called for the mitigation of their possible side effects, if any, on bank intermediation. So in essence, the tiering of the deposit rate could be considered if and when the bank believes that the side-effects of negative rates have become too big.
5. The pricing of the new TLTRO-III operations should be data-dependent and take into account a thorough assessment of the bank-based transmission channel of monetary policy, as well as further developments in the economic outlook. Some arguments were put forward in favour of pricing the new operations so that they would primarily serve as a backstop, providing insurance in times of elevated uncertainty. Other arguments supported the view that the TLTRO-III operations should also be seen as a potential tool for adjusting the monetary policy stance.

The U.S. Commerce Department announced on Thursday that the sales of new single-family homes decreased 6.9 percent m-o-m to a seasonally adjusted annual rate of 673, 000 units in April, as prices surged, but demand for housing remains underpinned by lower mortgage rates.

Economists had forecast the sales pace of 675,000 last month.

March’s sales pace was revised up to 723,000 units from the originally reported 692,000 units.

According to the report, new home sales in the South, the largest area, fell 7.3 percent m-o-m in April, while sales in the Midwest dropped 7.4 percent m-o-m and those in the West declined 8.3 percent m-o-m. Meanwhile, sales in the Northeast surged 11.5 percent m-o-m.

In y-o-y terms, new home sales recorded a 7.0 percent advance in April.

Preliminary data released by IHS Markit on Thursday indicated that the U.S. private sector growth in May expanded at the weakest pace since May 2016.

According to the report, the Markit flash manufacturing purchasing manager's index (PMI) stood at 50.6 in May down from 52.6 in April. The latest reading pointed to the weakest rate of expansion in the manufacturing sector since September 2009.

Economists had expected the reading to edge down to at 52.5. 

A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. 

According to the report, the paces of expansion for output, employment and pre-production inventories slowed, while new orders dropped for the first time since August 2009.

Meanwhile, the Markit flash services purchasing manager's index (PMI) decreased to 50.9 this month, down from 53.0 in the prior month. The reading indicated the slowest increase is the services sector since March 2016, as the rate of growth of the new orders eased for the third successive month amid softer demand conditions and intense competition.

Economists had expected the reading to increase to 53.2. 

Overall, IHS Markit Flash U.S. Composite PMI Output Index came in at 50.9 in May, down from 53.0 in the previous month, indicating the slowest expansion in overall business activity since May 2016. 

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit noted, “Growth of business activity slowed sharply in May as trade war worries and increased uncertainty dealt a further blow to order book growth and business confidence. A decline in the headline ‘flash’ PMI to its lowest for three years pushes the survey data down to a level historically consistent with GDP growing at an annualized rate of just 1.2% in May. Worse may be to come, as inflows of new business showed the smallest rise seen this side of the global financial crisis. Business confidence has meanwhile slumped to its lowest since at least 2012, causing firms to tighten their belts, notably in respect to hiring. Jobs growth in May was the weakest seen for over two years.”

Jan von Gerich, an analyst at Nordea Markets, suggests that the ECB’s April monetary policy account implies that the bank needs more data to guide its future monetary policy steps.

• Despite the weakened outlook, entirely new easing measures are not on the table, as the ECB concentrates on forward guidance and the TLTROs.

1. The ECB is not close to announcing new monetary policy measures
2. Confidence towards the baseline economic scenario within the ECB weakened
3. Worries about lower inflation expectations on the increase
4. Governing Council far from united on the side effects of negative rates and the TLTRO terms – more data needed

• The April monetary policy account did not include major new signals or hints about where monetary policy is heading. There was a lot of discussion on the economy and the uncertain outlook, with some Governing Council members were more worried than others.
• The ECB’s baseline remains that while the manufacturing sector has taken a hit, the services sector continues to do better and the soft patch the economy is experiencing will turn out to be only temporary.
• The incoming economic data have not been all bad since the April meeting. Q1 GDP numbers surprised to the upside as did April inflation, while the recent PMIs raise new worries. Against this background, the ECB is probably not feeling an immediate need to act. While we expect another extension of forward guidance and relatively easy terms for the targeted longer-term refinancing operations (TLTROs) to be announced in June, further important data releases, such as the May inflation number on 4 Jun, will be out before the meeting and will impact the decision.

U.S. stock-index futures fell on Thursday, as investors worried that the U.S.-China trade spat could spiral into a technology cold war between the two countries.

Global Stocks:

(company / ticker / price / change ($/%) / volume)

Statistics Canada reported on Thursday the wholesale sales rose 1.4 percent m-o-m in March, following a revised 0.2 percent m-o-m increase in February (originally a 0.3 percent m-o-m gain).

Economists had forecast an advance of 0.9 percent m-o-m for March.

According to the report, higher sales were recorded in six of seven subsectors, accounting for 82 percent of total wholesale sales. The motor vehicle and motor vehicle parts and accessories subsector (-2.0 percent m-o-m) was the only subsector to decline. Excluding this subsector, wholesale sales surged 2.2 percent m-o-m in March.

At the same time, wholesale inventories increased 0.4 percent m-o-m in March. Inventories were up in four of seven subsectors, representing about 73 percent of total wholesale inventories.

The data from the Labor Department revealed on Thursday the number of applications for unemployment benefits decreased last week, indicating the jobs market remains tight even as the economy slows.

According to the report, the initial claims for unemployment benefits fell 1,000 to 211,000 for the week ended May 18.

Economists had expected 215,000 new claims last week.

Claims for the prior week were remained unchanged at 212,000.

Meanwhile, the four-week moving average of claims fell 4,750 to 220,250 last week.

• Says that Huawei is deeply tied to China and its Communist Party
• Says that Huawei is making false statements
• Says there is a real risk from China towards the U.S. national security

Medtronic (MDT) reported Q4 FY 2019 earnings of $1.54 per share (versus $1.42 in Q4 FY 2018), beating analysts’ consensus of $1.47.

The company’s quarterly revenues amounted to $8.146 bln (0.0% y/y), generally in line with analysts’ consensus estimate of $8.121 bln.

The company also issued upside guidance for FY 2020, projecting EPS of $5.44-5.50 (versus analysts’ consensus estimate of $5.43) and revenue growth to approximate 4.0 percent on an organic basis.

MDT rose to $90.90 (+2.41%) in pre-market trading.

• Confidence in recovery in the second half of 2019 somewhat lower but data is still consistent with a baseline scenario
• Some recent data has been even weaker than expected
• Signs of moderation in global activity have continued
• Says that trade weakness is still seen persisting
• Inflation remains uncomfortably below ECB's target
• Says that drop in a long-term gauge of inflation expectations mainly reflects a weaker economy and is not unanchoring
• Says that TLTRO terms to be considered at one of the forthcoming meetings
• Some officials argued for TLTRO to function as a backstop, some want to use it for adjusting the policy stance

Best Buy (BBY) reported Q1 FY 2019 earnings of $1.02 per share (versus $0.82 in Q1 FY 2018), beating analysts’ consensus of $0.87.

The company’s quarterly revenues amounted to $9.142 bln (+0.4% y/y), generally in line with analysts’ consensus estimate of $9.138 bln.

The company also reaffirmed guidance for FY 2019, projecting EPS of $5.45-5.65(vs. analysts’ consensus estimate of $5.67) and revenues of $42.9-43.9 bln (vs. analysts’ consensus estimate of $43.54 bln).

BBY rose to $70.44 (+1.84%) in pre-market trading.

TD Securities' analysts point out that ECB will release the minutes from its 10 April meeting at 7:30 am ET (11:30 GMT) and this will be a key event for today.

• While President Draghi hinted in his press conference that all instruments would be "live" at the upcoming June meeting, the minutes are likely to provide few details on his thinking, while reiterating that TLTRO details are due to be announced in early June.
• It's also worth bearing in mind that the meeting was held before the above-trend Q1 GDP data was released, so some of the expected cautious tone will be somewhat out of date. The ECB's Nowotny speaks at noon ET.

• Says that May is in discussion with ministers on Brexit bill
• Expects replacement to Leadsom to be announced later today
• Says that May and Cabinet are focused on delivering Brexit

• Withdrawal Agreement cannot be reopened

Jane Foley, senior FX strategist at Rabobank, points out that the best performing G10 currency on a 1 day view is the safe haven JPY followed by the CHF and the USD and a day which has the safe haven JPY at the top of the table and the AUD at the bottom sends a clear message about the levels of anxiety in the market.

“Traditionally the JPY and the CHF have been the FX market’s preferred safe haven currencies. The USD has traditionally had a more volatile relationship with the status of safe haven. Given growing recognition that that the current dispute between the US and China could be more cold war than trade war and on the back of growth tensions regarding Iran we see risk for USD/JPY to push towards the 108.00 area in the coming months.  That said, we expect the USD to outperform a wide basket of other currencies.”

A no-deal exit by the United Kingdom from the European Union would push sterling to its lowest against the euro since the global financial crisis a decade ago, UBS Wealth Management said.

UBS said the UK currency would hit 97 pence, just short of parity against the euro. That would be its weakest since December 2008. It also predicted it would fall to $1.15, its lowest since a flash crash in October 2016.

"Investors should not be complacent about the threat of a no-deal exit," said Dean Turner, UK economist at UBS Wealth Management.

In turn, a decision to remain in the bloc would likely cause a swift rebound in sterling. Turner said he believes the pound is undervalued relative to its purchasing power parity level of around $1.58.

Bert Colijn, senior economist at ING, notes that the Eurozone’s PMI increased from 51.5 to 51.6 in May, but concerns about manufacturing persist.

“PMI provides relief that the service sector is still going strong in May, but alarm bells continue to sound for the eurozone industry. While the PMI for manufacturing output ticked up from 48 to 49, it’s still indicating a contraction. New orders continued to decline consecutively for the eighth month in a row now, mainly thanks to weak export orders. Expectations for the coming year weakened to the lowest reading since 2014. As the trade conflict between China and the US flares up again, global growth concerns are back on the agenda. On the other hand, postponing car tariffs will provide at least temporary relief to the eurozone industry. For the ECB though, today’s PMI will confirm a slow-growth environment in which inflation is unlikely to accelerate anytime soon.”

The General Court of the European Union said the European Central Bank does not have to compensate private holders of Greece's sovereign debt who were forced to take losses during the 2012 international bailout of the country.

Some investors were seeking compensation for the haircut they were forced to accept during Greece's second bailout, which was accepted by most holders of Greek bonds.

They wanted the ECB to reimburse them because the central bank had not opposed the Greek law that authorised the haircut, but the EU court said the ECB had acted lawfully and rejected their claims.

The United States needs to correct its wrong actions if it wants to continue negotiations with China to end a damaging tariff war, China’s Commerce Ministry said on Thursday, adding that talks should be based on mutual respect.

The United States has escalated trade frictions greatly, and increased chances of a global economic recession, spokesman Gao Feng said at a weekly briefing, adding that Beijing will take necessary steps to safeguard Chinese firms’ interests.

According to the report from Ifo Institute for Economic Research, the headline IFO business climate index came in at 97.9 in May, weaker than last month's 99.2 and also missing consensus estimates (99.1).

Meanwhile, the current economic assessment also missed estimates by a big margin and arrived at 100.6 points in the reported month as compared to last month's 103.4 and 103.5 anticipated.

On the other hand, the Expectations Index – indicating firms projections for the next six months, came in at 95.3 for May, matching previous months reading and better than market expectations of 95.0.

According to the preliminary estimate PMI data from IHS Markit, the pace of eurozone economic growth remained subdued in May amid stagnant demand. Jobs growth slipped to the joint-lowest since 2016 as firms scaled back expansion plans in the light of weak sales. Optimism about the future meanwhile slumped to a four-and-a-half year low and inflationary pressures moderated as competition limited sellers’ pricing power.

• Eurozone Composite PMI recorded 51.6 in May, up only fractionally from 51.5 in April.

• Flash Eurozone Services PMI Activity Index at 52.5 (52.8 in April). 4-month low.

• Flash Eurozone Manufacturing PMI(3) at 47.7 (47.9 in April). 2-month low.

The weak reading puts growth in the second quarter so far on a par with the lacklustre gain seen in the first quarter and is among the lowest recorded since mid-2013. After rising to a modest five-month high in April, growth of new business waned again in May to show only the smallest of increases. New export orders fell markedly again, down for an eighth successive month, though the decline was less steep than in the prior two months. The lack of new business meant backlogs of work fell for the fifth time in the past six months, reflecting the near-absence of new business growth and indicative of spare capacity developing.

Looking ahead, companies reined-in their expectations of growth in the coming year to the lowest since October 2014. Expectations hit the lowest since 2014 in services and remained among the weakest since 2012 in manufacturing, despite lifting higher for a second month running.

According to the latest PMI data from IHS Markit, business activity across Germany’s private sector continued to grow at a moderate pace in May.

Flash Germany Composite Output Index – which is based on approximately 85% of usual monthly replies – registered a reading of 52.4, up slightly from 52.2 in April and its highest since February. Other indicators weakened, however, with new orders falling for the fourth time in five months and employment growth easing to its lowest in just over three years in April. On the price front, latest data showed a slowdown in the rates of both input cost and output charge inflation.

The moderate rise in business activity in May was once again driven by the service sector, where output continued to rise at a relatively robust pace, albeit one that was the slowest in four months. Manufacturing output fell for the fourth month in a row, though the rate of decline slowed for the second month running and was the weakest since February.

Despite goods production falling at a slower rate, May saw the Flash Manufacturing PMI tick down slightly from 44.4 in April to 44.3, owing to negative influences from the employment, stocks of purchases and supplier delivery times components. Next to March’s recent low, the latest PMI reading was the second weakest in nearly seven years. Meanwhile, Flash Services PMI Activity Index fell from 55.7 in April to 55.0 (4-month low).

According to analysts at TD Securities, despite recent divergence between activity and survey data in Europe, they finally expect improvements in the flash PMIs for May.

“In France, we look for the PMI Services to rise half a point to 51.0 (mkt: 50.8), while the German PMI Manufacturing rises to 46.0 (mkt: 44.8). Shortly after, the German IFO for May is released, and we look for a gain of about half a point in both the Current Assessment (to 104.1; mkt: 103.5) and Expectations (to 95.7; mkt: 95.0) indexes. At lunchtime, the ECB releases minutes from its 10 April meeting. While President Draghi hinted in his press conference that all instruments would be "live" at the upcoming June meeting, the minutes are likely to provide few details on his thinking, while reiterating that TLTRO details are due to be announced in early June. It's also worth bearing in mind that the meeting was held before the above-trend Q1 GDP data was released, so some of the expected cautious tone will be somewhat out of date.”

British employers offered staff pay rises averaging 2.5% as part of wage settlements in the three months to April, matching the trend seen earlier in 2019, industry data showed.

Human resources data firm XpertHR said pay settlements had hovered around the same for the past four months, despite a small pick-up in inflation.

After years of real-terms falls in pay, Britain's workers have had some of the biggest pay rises in a decade in recent months due to a tight labour market, though they are modest compared to pre-financial crisis rates of pay growth.

The risk of a disruptive Brexit has made some employers keener to hire new staff, who can be sacked if the economy sours, than to make long-term labour-saving investments.

According to the final report from Federal Statistical Office (Destatis), German economy continued to grow at the beginning of the year. The gross domestic product (GDP) increased by 0.4% (after price, seasonal and calendar adjustment) in the first quarter of 2019 compared with the fourth quarter of 2018. The German economic performance last declined slightly in the third quarter of 2018 (-0.2%) and stagnated in the fourth quarter of 2018 (0.0%).

The quarter-on-quarter comparison (price, seasonally and calendar adjusted) shows that positive contributions mainly came from domestic demand. Gross fixed capital formation in machinery and equipment increased by 1.2% from the fourth quarter of 2018. Gross fixed capital formation in construction was up by as much as 1.9%. Furthermore household final consumption expenditure rose by 1.2%. A similarly strong increase in the final consumption expenditure of households was last observed in 2011. However, government final consumption expenditure recorded a decline (-0.3%).

Compared with a year earlier, the price adjusted GDP rose by 0.6% (calendar adjusted: 0.7%) in the first quarter of 2019. The price-adjusted GDP was up 0.9% (calendar adjusted: 0.6%) in the fourth quarter of 2018 and 1.1% (calendar adjusted: 1.1%) in the third quarter of 2018 on the relevant quarters a year earlier.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1312 (4295)

$1.1272 (2984)

$1.1240 (1570)

Price at time of writing this review: $1.1147

Support levels (open interest**, contracts):

$1.1117 (4508)

$1.1081 (3956)

$1.1039 (2883)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date June, 7 is 117369 contracts (according to data from May, 22) with the maximum number of contracts with strike price $1,1500 (9035);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2916 (677)

$1.2835 (358)

$1.2772 (600)

Price at time of writing this review: $1.2639

Support levels (open interest**, contracts):

$1.2613 (4067)

$1.2585 (1720)

$1.2553 (2398)

Comments:

- Overall open interest on the CALL options with the expiration date June, 7 is 40119 contracts, with the maximum number of contracts with strike price $1,3450 (3277);

- Overall open interest on the PUT options with the expiration date June, 7 is 40031 contracts, with the maximum number of contracts with strike price $1,2700 (4067);

- The ratio of PUT/CALL was 1.00 versus 0.98 from the previous trading day according to data from May, 22

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.