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Major US stock indices fell markedly as investors analyzed disappointing ISM manufacturing index data and the latest trading news.

A report by the Institute for Supply Management (ISM) showed that business activity in the US manufacturing sector unexpectedly declined in November. According to the report, the ISM manufacturing activity index last month was 48.1 points compared with 48.3 points in October. The index was expected to rise to 49.2 points. Recall that a value below 50 points indicates a decrease in activity.

The mood also overshadowed the statements of US President Trump that China still wants to conclude a trade deal, “but we will see what happens.” In addition, US Secretary of Commerce Wilbur Ross said in an interview with Fox Business that negotiations with China can be described as “one step forward, one step back”, and added that if the parties do not reach an agreement by December 15, then new tariffs on the Chinese products will take effect. These comments appeared after the Chinese publication Global Times said on Sunday that Beijing wants US tariffs to be canceled as part of the first phase of the deal.

Thus, there are no clear signals yet when both countries will be able to sign a trade agreement, and last week new friction was noted between Washington and Beijing after U.S. President Donald Trump signed the law to support protesters in Hong Kong.

The head of the White House also said on Monday that he would resume tariffs on metal imports from Brazil and Argentina. Trump wrote on Twitter: “Brazil and Argentina are actively devaluing their national currencies, which is bad for our farmers. In this regard, I immediately reintroduce tariffs on steel and aluminum coming to us from these countries. ”He also called on the Fed to reduce the stock, saying:“ The Federal Reserve should do the same in order to stop many countries from taking advantage of the benefits strong US dollar. Fed, cut rates and soften politics! ”

Most of the DOW components completed trading in the red (22 of 30). The outsider turned out to be the shares of The Boeing Company (BA; -2.58%). The biggest gainers were Exxon Mobil Corp. (XOM; + 0.66%).

Almost all S&P sectors recorded a decline. Only the real estate sector grew (+ 1.6%). The largest decline was shown in the industrial goods sector (-1.2%).

At the time of closing:

Dow 27,799.92 -251.49 -0.90%

S&P 500 3,114.66  -26.32 -0.84%

Nasdaq 100 8,572.07 -93.40 -1.08%

• Says progress with China is "one step forward, one step back"
• If nothing happens between now and December 15, the new China tariffs will go into effect
• Phase one trade deal must be enforceable
• $40-50 bln in agricultural purchases are "essential" to any deal

The Commerce Department announced on Monday that construction spending fell 0.8 percent m-o-m in October after a revised 0.3 percent m-o-m decline in September (originally a 0.5 percent m-o-m drop). It marked the second straight monthly decrease in construction spending and the steepest decline since June.

Economists had forecast construction spending increasing 0.4 percent m-o-m in October.

According to the report, spending on private construction dropped 1.0 percent m-o-m, while investment in public construction fell 0.2 percent m-o-m.

On a y-o-y basis, construction spending rose 1.1 percent in October.

A report from the Institute for Supply Management (ISM) showed on Monday the U.S. manufacturing sector’s activity unexpectedly contracted in November.

The ISM's index of manufacturing activity came in at 48.1 percent last month, down 0.2 percentage point from the October reading of 48.3 percent, and missed economists' forecast for a 49.2 percent reading.

A reading above 50 percent indicates expansion, while a reading below 50 percent indicates contraction.

According to the report, the New Orders Index stood at 47.2 percent, recording a decrease of 1.9 percentage points from the October reading, while the Backlog of Orders Index registered 43 percent, down 1.1 percentage points compared to the October reading, the Employment Index was at 46.6 percent, a 1.1-percentage point from the October reading, and the Inventories Index came in at 45.5 percent, a decline of 3.4 percentage points from the October reading. At the same time, the Production Index registered 49.1 percent, up 2.9 percentage points compared to the October reading, the Supplier Deliveries Index came in at 52 percent, a 2.5-percentage point advance from the October reading and the Prices Index was at 46.7 percent, a 1.2-percentage point gain from the October reading of 45.5 percent.

Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee said, “The past relationship between the PMI and the overall economy indicates that the PMI for November (48.1 percent) corresponds to a 1.5-percent increase in real gross domestic product (GDP) on an annualized basis."

U.S. stock-index futures traded flat on Monday, as market participants continued to monitor U.S.-China trade talks, while awaiting ISM manufacturing activity survey for November.

Global Stocks:

• Euro area growth remains weak
• Weakness has been mainly due to global factors
• ECB is ambitious to do, and to play its part in accordance with its mandate
• Consumption is held up fairly well
• Central bank digital currency would allow citizens to use central bank money directly in their daily transactions
• Depending on its design, a central bank digital currency could pose risks
• Relative resilience of services so far is the key reason why employment has not been affected by the global manufacturing slowdown
• Governing councils decisions in September showed that it was alert to that potential side effects of monetary policy
• Strategy review will be guided by 2 principles, thorough analysis and an open mind
• It is premature to venture here into debate about the precise scope direction and timeline of our strategy review
• ECB remains resolute in its commitment to deliver on its mandate
• Monetary policy strategy will start in the near future
• Question that is common is how to best define the medium-term objective of monetary policy, so as to ensure that expectations are firmly anchored

Analysts at TD Securities note that China's manufacturing PMI moved back into expansion, edging above 50 in November, and offering some hope of a bottom in the sector.

• “The nonmanufacturing and composite PMIs moved further above 50. The breakdown of the manufacturing PMI was somewhat encouraging, but both export and import orders remain in contraction, pointing to ongoing trade weakness. Temporary factors such as pre-Christmas buying and recovery from Chinese New Year holidays, may explain at least some of the bounce.
• China's Caixin manufacturing PMI also beat expectations coming in at 51.8 (TD 51.6, mkt 51.5) in November. As with the official PMI hopes of a Phase 1 trade deal likely gave some support as did targeted easing as banks are increasingly encouraged to lend to smaller companies. Renewed, albeit mild CNY depreciation over recent weeks will also have given some support to exporter sentiment.”

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

Deere (DE) downgraded to Underperform from Neutral at BofA/Merrill

Jane Foley, the senior FX strategist at Rabobank, notes that according to CoreLogic data, house prices in Sydney rose by 2.7% m/m in November, marking its largest monthly rise since 1988.

• “Melbourne wasn’t far behind, recording growth of 2.2% m/m. Nationwide, Australian house prices jumped by 1.7% m/m, the fifth consecutive monthly increase, supported by the aggressive pace of RBA rate cuts this year. The strong performance of house prices is counter to the more gloomy tone of other Australian economic data releases. Together these messages highlight the delicate path that RBA policy makers must traverse in the New Year.
• Looking ahead, the news on house price inflation will strengthen the expectation that the RBA is likely to leave rates on hold at tomorrow’s policy meeting. However, the renewal of activity in the housing market is likely to be insufficient for prevent the RBA easing again in 2020.
• House prices aside there are plenty of domestic economic data releases suggesting that downside risks to growth are building.
• It is our expectations that tensions between the US and China will rise again in the months ahead and this will accelerate the economic headwinds blowing across Australia. In its Statement on Monetary Policy last month the RBA clarified that “the Board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the medium-term inflation target over time”. We would expect similar guidance from the RBA at tomorrow’s meeting, with the view that both the Cash rate and the AUD will trend lower into 2020. We forecast AUD/USD at 0.66 on a 3 month view.”

Analysts at ING suggest that the November ISM manufacturing survey is likely to remain in the contractionary territory today, but should nonetheless record some improvement (increasing from 48.3 to 49.0). 

• "US forward-looking indicators coupled with a likely solid US employment report on Friday does not warrant imminent rate cuts and should justify the Federal Reserve’s pause in its easing cycle. This should support the dollar vs G10 low yielders (EUR, JPY and CHF) this week. It should also reduce fears of a global slowdown (and point to a stabilization in global activity – also helped by today’s better than expected China Manufacturing PMI). This, in turn, should be supportive of emerging market currencies, and those offering high yield in particular.

Iris Pang, the economist for Greater China at ING, notes that Hong Kong retail sales fell 24.3%YoY in October after falling 18.2% the previous month. 

• "It is the ninth consecutive month of negative yearly growth. The continuing violent anti-government protests and ongoing China-US trade tensions account for this dismal situation. 
• As we have explained before this is very different from the disruption we saw during the SARS epidemic in the early 2000s.
• Tourists are not going to Hong Kong due to the brutal incidents at the airport, increasingly violent activities elsewhere and not to mention dreadful traffic conditions. 
• Sales of jewellery, mainland China tourists' favourite shopping item in Hong Kong, fell 42.9%YoY in October after big declines in August (-47.1%YoY) and September (-40.8%YoY).
• And, of course, it's not just tourism from mainland China that's declined. Tourism from everywhere (literally everywhere according to the Statistics Department) on a monthly basis since August has dropped by double digits. And this has widespread impact on accommodation and catering spend.   
• And it's not just foreigners who are reducing their spending. From the retail sales data, we note that domestic spending is way down, with clothing sales falling 36.9%YoY in October after a fall of 25.9%YoY in September. It was a similar story for shoes and accessories (-37.0%YoY in October after -17.0%YoY in September).
• The trade war has led to redundancies in that sector. Since 1Q18, when it all started to kick off, employment there has fallen by 15%, affecting 67,500 people up to 3Q18. These people would normally be expected to get a job in the retail sector. But unfortunately, due to the violent protests, we see a 6% decrease in employment in both retail and catering affecting some 35,600 people just in the third quarter. 
• These people are themselves, consumers. If they cannot find a new job, this will put additional pressure on retail sales and will create more unemployment in the industry, thus creating a vicious circle."

Analysts at Danske Bank suggest that the global economy after a period of sizeable monetary policy stimulus from major central banks and fiscal stimulus in China is showing tentative signs of stabilization but that there are still risks on the horizon, in particular, the U.S.-China trade war.

• “In our view, the risk of a global recession has declined to 25% (from 30%). We emphasize that the US-China trade talks is a key risk to the global economy in 2020 and with a 50/50 chance of a permanent trade deal between the two sides, there may be considerable uncertainties in the pipeline.”

Analysts at TD Securities are expecting the U.S. ISM manufacturing index to continue to recover in November, rising to 49.2 from 48.3 given recent optimism on trade discussions and the firming of some regional surveys, including Chicago and Philadelphia.

• “On the contrary, and largely reflecting a recent moderation in consumer spending, we look for a modest decline in the non-manufacturing index to a still firm 54.5 following last month's 2pt gain to 54.7.”

FX Strategists at UOB Group suggest USD/CNH is expected to keep the ongoing consolidative pattern unaltered in the near term.

• "24-hour view: USD traded in a quiet manner and within a relatively tight range of 7.0215/7.0375 last Friday (narrower than our expected sideway trading range of 7.0230/7.0430). The price action offers no fresh clues and we continue to expect USD to trade sideways, likely between 7.0230 and 7.0400.
• Next 1-3 weeks: There is not much to add as USD traded in a quiet manner and closed unchanged at 7.0326 last Friday (29 Nov). The movement is still viewed as part of a sideway-trading phase. In other words, we continue to expect USD to trade between 6.9700/7.0500 for a while more."

Analysts at Deutsche Bank suggest that China has given the world a boost by seeing the official manufacturing gauge at 50.2 (49.5 expected), the first 50+ print since April and up from 49.3 in October.

• “Non-manufacturing rose to 54.4 (consensus 53.1) from 52.8 last month. There is some chatter about strong seasonal helping but overall this will be seen as positive news. Meanwhile, China’s November Caixin manufacturing PMI also came in higher than consensus at 51.8 (vs. 51.5 expected).”

Analysts at Danske Bank note that today's data highlight is U.S. ISM manufacturing.

• “ISM manufacturing is weak but the regional indices and the Markit PMI manufacturing index point to an increase. We will also keep a close eye on the employment sub-index, which has been quite weak recently.
• ECB President Lagarde appears at her first Parliament hearing today after her term began in November. We do not expect any signs of monetary policy implications, but focus will be on the monetary policy strategy review.”

The TD Securities analysts offer key insights on how to trade the Reserve Bank of Australia (RBA) decision due on Tuesday at 0330 GMT.

“TD and consensus expect the RBA to keep the cash rate on hold at 0.75% at tomorrow's Board meeting. OIS is placing ~10% chance to a 25bps cut. We think it is highly unlikely the RBA cuts, pre-empting a possible weak Q3 GDP outcome on Wed. Granted, inputs for Q3 GDP have so far been weak – retail volumes -0.1%/q, Construction Work Done -0.4%/q, Capex -0.2%, equipment plant and machinery -3.5%. But Net exports could be slightly positive as could public spending (we will find out tomorrow). Even after all the partials are accounted for by Tues, ~30% of GDP will remain unknown heading into Wed’s Q3 GDP release, providing no compelling reason for the RBA to jump and cut ahead of the release. We expect the RBA to cut the cash rate to 0.5% in Feb’20.”

As the U.S.-China trade war drags into its 16th month and continues to disrupt supply chains, more than one-quarter of multinational firms have not made contingency plans, showed a survey from a subsidiary of courier giant DHL.

The survey here by DHL Resilience360, included 267 anonymous responses from supply chain executives across industries including healthcare, automotive and consumer.

Of respondents, 48% from the engineering and manufacturing industry and 40% from the automotive mobility sector reported that they had no contingency plans at all, even though both fields have been heavily targeted by both countries in the trade war.

Of those that had decided against relocating or shifting production out of China, some said they were unaffected by the trade war. However, 43% said long-established connections with Chinese factories and suppliers as well cost and time were among reasons for staying put. Just 8% of respondents said they expected tariffs to eventually be removed.

USD/CNH is expected to keep the ongoing consolidative pattern unaltered in the near term, suggested FX Strategists at UOB Group.

24-hour view: “USD traded in a quiet manner and within a relatively tight range of 7.0215/7.0375 last Friday (narrower than our expected sideway trading range of 7.0230/7.0430). The price action offers no fresh clues and we continue to expect USD to trade sideways, likely between 7.0230 and 7.0400”.

Next 1-3 weeks: “There is not much to add as USD traded in a quiet manner and closed unchanged at 7.0326 last Friday (29 Nov). The movement is still viewed as part of a sideway-trading phase. In other words, we continue to expect USD to trade between 6.9700/7.0500 for a while more”.

JPMorgan Chase & Co. strategists see next year’s expected global economic pick-up generating sub-par returns across the fixed-income, currency and commodity complex.

Developed-market bonds, as might be expected, will be laggards, with JPMorgan projecting losses in the single-digit percent range. More surprising might be the single-digit losses in commodities. Investors will get gains elsewhere, but not to the same extent typically registered in economic rebounds, the bank says.

Investment-grade credit -- where premiums are already low -- will see single-digit gains, while U.S. high yield and emerging-market credit will record mid-to-high single digit percent gains, according to JPMorgan.

“This isn’t the sort of return spectrum most would expect at a major turning point in the global economy,” JPMorgan strategists said. “The cause is an unusual macro and policy environment combined with high valuations in most of FICC.”

When global growth improved following a mid-cycle slump in the past -- as in 1995, 1999, 2012 and 2016 -- defensive assets delivered below-average or negative returns, while cyclicals such as credit, emerging markets and commodities posted above-average ones, according to JPMorgan’s analysis.

“Even if the more cyclical sectors of FICC beat bonds and cash next year, there wouldn’t be much precedent for the entire FICC spectrum to return less than their historical average,” the team wrote.

According to the report from IHS Markit/CIPS, the UK manufacturing downturn continued in November, as businesses responded to the delay to Brexit and a fresh injection of uncertainty from the forthcoming general election. Output, new orders and employment all fell, while destocking activity resumed as firms depleted buffers built up in advance of the postponed exit date.

The headline seasonally adjusted manufacturing PMI slipped to 48.9 in November, down 49.6 in October but above the earlier flash estimate of 48.3. The PMI has remained below the neutral mark of 50.0 for seven successive months.

November saw a reduction in manufacturing output, with the rate of decline accelerating slightly over the month. Companies reported scaling back production in response to lower new order intakes. New orders fell for the seventh month in a row during November, reflecting tougher conditions in both domestic and overseas markets.

November saw manufacturing employment fall for the eighth straight month, with the pace of job losses the steepest since September 2012. Companies linked further cuts to cost reduction efforts, efficiencies, Brexit uncertainty, redundancies, natural wastage and staff restructuring.

November saw average selling prices increase for the forty third month in a row. However, charge inflation remained relatively mild overall, with the rates over the past three months among the weakest during the current sequence of increase. Input costs decreased – albeit marginally – for the first time since March 2016, linked to lower global commodity prices and exchange rate effects

According to the report from IHS Markit, November saw the continued contraction of the euro area manufacturing economy, albeit at the slowest rate for three months. 

Eurozone Manufacturing PMI improved to 46.9 in November, compared to October’s 45.9 and above the earlier flash reading (46.6). Whilst a relative improvement, the PMI nonetheless remained well below the crucial 50.0 no-change mark and extended the current period of contraction to ten months.

At the market groups level, both the intermediate and investment goods sectors remained inside contraction territory during November, although in each case rates of decline were weaker. Operating conditions for consumer goods producers were unchanged compared to October. 

At the aggregate eurozone level, ongoing declines in output and new orders were again recorded. For production, the rate of contraction was however the slowest in three months, whilst new work recorded its mildest fall since June.  November’s reduction in new work nonetheless maintained a run of contraction that began in October 2018. A similar trend was seen for new export orders, which also fell for a fourteenth successive month but at the weakest pace since June.

Finally, there was a notable improvement in business confidence to a five-month high in November as sentiment continued to recover from August’s near seven-year low. All nations covered by the survey indicated some optimism that output would be higher than present levels in 12 months’ time, albeit to varying degrees

The Confederation of British Industry (CBI) and a manufacturing trade body, Make UK, have made downward revisions to their 2020 UK growth forecasts amid looming Brexit risks and bleak global economic outlook.

The CBI predicted economic growth of 1.3% this year and 1.2% in 2020, followed by a pick-up to 1.8% in 2021, assuming Johnson reaches a trade deal with the EU that leads to no tariffs and little divergence from EU rules.

CBI chief economist Rain Newton-Smith said: Alongside perennial Brexit uncertainty, (businesses) are also contending with softer global demand. A no-deal Brexit would put the brakes on UK growth and realise businesses’ worst fears.

Make UK halved its forecast for manufacturing growth next year to 0.3% from 0.6%, though it kept its forecast for growth in the overall economy in 2020 unchanged at 1.4%, up from 1.3% this year.

Following the recent price action, EUR/GBP could attempt a bounce in the next days, according to Karen Jones, Team Head FICC Technical Analysis Research at Commerzbank.

“The market came under pressure last week, however given that the market has again seen divergence of the daily RSI, we suspect we will see only a very slow grind lower at best and may in fact see a bounce higher this week. EUR/GBP remains stuck below last week’s high at .8606 and has now eroded last week’s low at .8522. Below here lies the May low at .8465. We note the TD support at .8440 and we look for the market to hold here. Above last week’s high at .8606 lies a minor downtrend channel resistance line at .8622 ahead of the four month downtrend line at .8760. Overhead resistance is reinforced by .8786 the mid-September low”.

Karen Jones, Team Head FICC Technical Analysis Research at Commerzbank, expects the upside momentum in USD/CHF to fail in the 1.0014/28 band.

“USD/CHF is probing the 1.0014/28 mid-June, October peaks and Fibonacci retracement. These are expected to cap - this is essentially the top of the recent range, we would expect failure, we note the TD perfected set up on the daily chart. Failure here will target the .9844/41 September and October lows. Failure at the next lower .9799 September low would push key support at .9716/.9659 to the fore. This is the location of the January, June, mid and late August lows. Below here sits the .9659 August low and the September 2018 low at .9543”.

According to the report from Federal Statistical Office (FSO), turnover adjusted for sales days and holidays rose in the retail sector by 0.1% in nominal terms in October 2019 compared with the previous year. Seasonally adjusted, nominal turnover rose by 0.9% compared with the previous month. Real turnover adjusted for sales days and holidays rose in the retail sector by 0.7% in October 2019 compared with the previous year. Real growth takes inflation into consideration. Compared with the previous month, real, seasonally adjusted retail trade turnover registered an increase of 1.0%.

Adjusted for sales days and holidays, the retail sector excluding service stations showed a 0.5% increase in nominal turnover in October 2019 compared with October 2018 (in real terms +1.1%). Retail sales of food, drinks and tobacco registered a decline in nominal turnover of 1.6% (in real terms -0.9%), whereas the non-food sector registered a nominal plus of 2.2% (in real terms +2.8%).

Excluding service stations, the retail sector showed a seasonally adjusted increase in nominal turnover of 0.8% compared with the previous month (in real terms +1.1%). Retail sales of food, drinks and tobacco registered a nominal minus of 0.5% (in real terms -0.1%). The non-food sector showed a plus of 1.4% (in real terms +1.5%).

Citi discusses the GBP outlook around the possible different outcome of the Dec-12 UK elections.

"An outright Conservative majority would likely see PM Johnson being able to pass his Brexit deal as the base case outcome before year-end (likely sterling bullish). PM Johnson has indicated that the UK Parliament will be summoned on December 17 if he wins a majority and the Queen's speech – which marks the formal start of a new government – will take place December 19. If it is a different government, then the Queen's speech is expected January. This means that hypothetically, a Brexit deal could pass the House of Commons before Christmas and well before the January 31 deadline. But even the second most likely outcome is likely GBP positive – an economically constrained Labor + Lib-Dem + SNP supply & confidence agreement opens the door to a People’s Vote without No Deal on the ballot paper. A hung parliament on the other hand would likely be GBP bearish but looks highly unlikely if this week’s polling is on the mark," Citi adds.

Analysts at Danske Bank offered their take on the official Chinese Manufacturing PMI released over the weekend, which showed an unexpected jump in China’s manufacturing activity in November.

“Chinese November PMIs (the official ones) released Saturday were much better than expected. The PMI manufacturing rose from 49.3 to 50.2 (both we and consensus had expected it to stay below the 50 threshold), the highest level since early 2019 although the level remains below the levels in 2017 and 2018. The PMI non-manufacturing index rose to 54.4 from 52.8, the highest since early 2019. Also the private Caixin PMI manufacturing index came out better than expected , basically unchanged at a high level (51.8 versus 51.7 in October). We had expected a decline, as it has painted a very bright picture as of late, so the unchanged print is very positive. Overall, the PMIs support our view that the worst is behind us and China has begun a moderate acceleration supported by stimulus and declining trade war fears . It is good news, as China drives one-third of global GDP growth and Chinese PMIs lead global PMI by a couple of months.”

EUR/USD

Resistance levels (open interest**, contracts)

$1.1152 (4828)

$1.1104 (3270)

$1.1063 (2849)

Price at time of writing this review: $1.1016

Support levels (open interest**, contracts):

$1.0989 (4027)

$1.0947 (3364)

$1.0899 (2532)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date December, 6 is 107591 contracts (according to data from November, 29) with the maximum number of contracts with strike price $1,1200 (5618);

GBP/USD

Resistance levels (open interest**, contracts)

$1.3065 (1435)

$1.3027 (5685)

$1.2997 (1567)

Price at time of writing this review: $1.2917

Support levels (open interest**, contracts):

$1.2863 (1246)

$1.2789 (2138)

$1.2744 (1004)

Comments:

- Overall open interest on the CALL options with the expiration date December, 6 is 32304 contracts, with the maximum number of contracts with strike price $1,3000 (5685);

- Overall open interest on the PUT options with the expiration date December, 6 is 33653 contracts, with the maximum number of contracts with strike price $1,2200 (2280);

- The ratio of PUT/CALL was 1.04 versus 1.04 from the previous trading day according to data from November, 29

* - 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.