On mid-Tuesday, Dow almost flat and recovered from Google/Alphabet plunge on U.S. bipartisan deal of $2T infra capex. Earlier, Dow slumped almost -135 points on a terrible report card from Google parent Alphabet (NASDAQ:GOOGL) (revenue miss), subdued global cues after muted manufacturing PMI from China (although the bad news is now good news for China as it could open the gate for more stimulus) and ongoing suspense about the US-China trade talks. But pharma majors Merck, Pfizer (NYSE:PFE) is helping on earnings beat, while GE is also upbeat on the mixed report card (earnings beat, while cash-flow disappoints). But the market is also getting the support of lower USD amid upbeat economic data from the Eurozone, hopes of 2nd Brexit referendum and month-end rebalancing.
Energies helped on Buffet interest and higher oil amid renewed geopolitical tensions in Venezuela and Saudi pledge to extend OPEC+ production cut agreement to Dec’2019 (year-end).
Alphabet dragged the communication sector as its Q1 revenue missed estimate; sparking concern advertisers are shifting some spending from Google to other digital rivals. Alphabet reported net revenue at $29.5B, UP 19% (y/y) against expectations of $30.04B, while EPS was at $11.90 vs estimate of 10.60. The EPS figures included/adjusted the impact of a $1.7B fine imposed by the EU. The net profit in the first quarter was $6.66 billion, which included the EU fine for Alphabet's alleged antitrust practices and abusing its dominant position in online advertising to hurt competitors.
Alphabet's CFO, Ruth said: "We delivered robust growth led by mobile search, YouTube, and Cloud with Alphabet revenues of $36.3 billion, up 17% vs. last year, or 19% on a constant currency basis. We remain focused on, and excited by, the significant growth opportunities across our businesses”.
Ruth also suggested recent ad product changes were affecting Alphabet's top-line growth, but she didn't elaborate on what those changes involved, while did say that such moves were made with the long-term interests of users and advertisers in mind and that the company wasn't interested in “managing” quarterly numbers.
The market was also anxious about the lingering suspense of the US-China trade talks. On Tuesday, the White House Chief of Staff Mulvaney said the US-China trade talks likely to be resolved 'one way or another' in the next two weeks as talks can't go on forever, while it must be a good deal.
Earlier Tuesday, after arriving at Beijing with the USTR Lighthizer for the 11th round of marathon trade talks, the US Treasury Secretary Mnuchin said he hopes to make substantial progress on trade negotiations. Mnuchin said “We have a meeting here, and then the vice premier and team will be coming back to Washington and we hope to make substantial progress in these two meetings. I’m not going to comment on specific issues of the discussions… They’ve been quite broad as I’ve said before. We’ve made a lot of progress. We look forward to the meetings here”.
Meanwhile, China’s Foreign Ministry said: “In recent months, both countries’ economic and trade teams have held many rounds of high-level consultations and achieved much positive progress. China hopes that both sides can work hard, exclude disturbances, and reach a mutually beneficial, win-win agreement”.
There was also a report that apart from structural issues, Trump tariffs are now a major stumbling block (obstacle) for the US-China trade deal, contrary to the White House narrative that a deal is imminent.
The report said: “Tariffs that Started the U.S.-China trade conflict now dog its finish as the U.S. pushes to leave in place some of the duties it levied on $250 billion of Chinese goods as a tool to enforce a coming agreement. As U.S. and Chinese officials try to close a trade deal, the punitive tariffs the governments slapped on each country’s goods in the conflict stand as a major obstacle”.
In brief, the report suggested that the main issue is how much of the tariffs the US levied on $250B of Chinese goods will be removed. Trump admin wants to leave some in place as a tool (leverage) to enforce the agreement while Chinese negotiators see those tariffs as a major issue (as a basic thing of a trade deal is the removal of additional retaliatory tariffs), and negotiators on both sides are struggling for at least a month on this issue). There are also other issues include an enforcement mechanism, access to agriculture and opening China's cloud computing market.
On Tuesday, Mulvaney was asked about Mnuchin’s suggestion that the White House could announce an agreement with Beijing in the next two weeks.
Mulvaney answered: “I think that’s fair. Someone asked me how long is the negotiation going to go on and I don’t have a specific answer to that. It won’t go on forever. I think at some point in any negotiation you realize: ‘OK: we’re close to getting something done so we’re going to keep going.’ On the other hand, at some point, you just throw your hands up and say ‘you know this is never going to get anywhere. I think you’ll know one way or the other in the next couple of weeks. I think that’s probably fair—but the U.S. would not accept an agreement with China unless it was a great deal”.
Mulvaney also casts doubts on Trump’s other major trade initiative like the replacement of the NAFTA. The US Congress so far has not moved to ratify the deal, dubbed as the USMCA, amid Democratic concerns about environmental and labor protections. While Mulvaney contended that the deal would pass overwhelmingly in a bipartisan way if it got to the House floor, he showed doubts about whether House Speaker Pelosi would bring it to a vote: “She controls the floor and if it doesn’t come up for a vote, it won’t see the light of day”.
Notably, in an op-ed, titled “Trump’s Tariffs End or His Trade Deal Dies,” the Senate Finance Committee Chairman Grassley urged the president to remove tariffs on steel and aluminum imports from Canada and China before lawmakers approve the agreement.
On Tuesday, Mulvaney, a close Trump adviser indicated if Congress does not move to ratify the agreement, Trump could stick with NAFTA or revive his threat to pull out of the NAFTA agreement.
On Tuesday, the US market also recovered from deep loses on bipartisan talks about a huge infra spending of $2T (over 10 years). The Senate Democratic Leader Schumer said that President Trump agreed to support a $2T infrastructure spending package after meeting with him and other Democrats at the White House.
Schumer said: “We agreed on a number - which was very, very good--Two trillion dollars for infrastructure. Originally, we started a little lower. Even the president was eager to push it up to two trillion dollars. It’s clear both White House and Democrats want to get something done on infrastructure and Democrats too want Trump's ideas on infrastructure funding. The White House (Trump), Democrats will meet again to discuss infrastructure in three weeks”.
Pelosi said “We would have further meetings to figure out how to pay for it, which is also going to be critical. There is talk if boosting the gasoline tax (to pay for infra spending). Meeting with Trump on infra was productive and we agreed with Trump for big, bold infra package. Trump agreed infrastructure should include broadband”.
The “risk-on” sentiment got some boost on bipartisan policy push rather than paralysis in the aftermath of Muller’s report. Trump and Democrats may have made a deal on infra ahead of the 2020 election, although we could also see some “Muller’s jitters” in this great game of politics.
Technical Outlook: SPX-500, DJ-30, NQ-100
Technically, whatever may be the narrative, SPX-500 has to sustain over 2950 for a further rally to 2975*/2990-3020/3050* and 3080/3135-3180/3220 in the near term (under bullish case scenario).
On the flip side, sustaining below 2945-2940, SPX-500 may fall to 2915*/2895-2865/2840* and 2815/2785-2760/2740 in the near term (under bear case scenario).
Technically, whatever may be the narrative, DJ-30 has to sustain over 26600-26705 for a further rally to 26850/26955*-27050*/27400 and 27750/28100-28375/28650 in the near term (under bullish case scenario).
On the flip side, sustaining below 26550, DJ-30 may fall to 26300/26150*-25950/25850* and 25500/25350-25200/25000 and 24800 in the near term (under bear case scenario).
Technically, whatever may be the narrative, NQ-100 has to sustain above 7905 for a further rally to 7955/8050*-8120/8195 and 8250/8360-8510/8660 in the near term (under bullish case scenario).
On the flip side, sustaining below 7875-7850*, NQ-100 may fall to 7790/7725*-7665/7625* and 7575/7535-7500/7440 in the near term (under bear case scenario).
US 500
Dow edged up Monday on hopes of dovish Fed amid goldilocks U.S. economic data, ongoing suspense about the China trade deal and mixed earnings
The US stock market edged up Monday on hopes of dovish Fed amid Goldilocks economic data, ongoing suspense about the China trade deal, subdued global cues (as China was in stress amid the concern of less stimulus) and renewed Boeing (NYSE:BA) woes (as the new question being raised by FCC). The market was also cautious ahead of the key earnings report card.
The US market was also helped by an upbeat US consumer spending, while the soft US core PCE inflation at +1.6% from prior +1.7% also helped as it could make the Fed in pause mode for entire 2019, although Fed will observe Q2 data for its revised dot-plots if any in June. The US market was also helped by a lower US dollar index, eased further by -0.15% on Monday. The USD was undercut by the concern of IOER rate cut by the Fed on 1st May (policy meeting) by -0.05%, so that the EFFR stays below the IOER, the main reason of current USD strength.
On Monday, the White House CEA/NEC Kudlow again said slowing inflation opens the door for possible Fed rate cut.
In an interview, Kudlow said: "The Fed is independent, but they have been themselves talking about coming and lowering their inflation target, which might mean a lower interest rate adjustment on their own timetable”. Kudlow also said the White House is still behind Moore, a known uber-dove and Trump favorite, for the Fed Governor.
The US personal spending jumped +0.9% in March from prior +0.1% and was higher than the expectations of +0.7% (y/y). But the US personal income edged down to +0.1% in March from prior +0.2% lower than the expectations of +0.4% (y/y) and also may be an indication that such high consumer spending may not be sustainable.
Notably, Consumer spending accounts for almost 70% of the US economic activity was the biggest rise since August 2009 and was also driven by increased healthcare expenditures. The real consumer spending (inflation-adjusted) grew at +0.7% in March may be indicating an acceleration in personal consumption was likely in the Q2 after soft 1.2% (y/y) in the Q1, the slowest in a year.
On China trade talks, the US Treasury Secretary Mnuchin said on Monday that trade talks (with China) are in final laps and verbal exchanges on IP theft continued elsewhere. As a pointer, Mnuchin and the USTR Lighthizer will be in Beijing on Tuesday to start another round (11th) of trade talks with China. Ahead of his China visit, Mnuchin said: “We’re getting into the final laps--both sides have a desire to reach an agreement and we’ve made a lot of progress”.
Mnuchin also did not want to say if the talks would conclude by the end of June but said only the world’s two largest economic desires to have an agreement. Mnuchin also declined to say if a collapse in negotiations would cause Trump to impose more tariffs on China.
On early Monday (US), in another interview, Mnuchin said: “The US seeks a reciprocal trade relationship with China and rebalancing the economic relationship between the US and China will present a greater opportunity for America’s economy. We want to have a reciprocal trading relationship and if we can do that, that's a tremendous opportunity for U.S. workers, for U.S. companies, to sell into a large, growing, China middle-class”.
According to the USTR, this week’s meeting will cover issues including IP, forced technology transfer, non-tariff barriers, agriculture, services, purchases, and enforcement. Chinese Vice Premier Liu He will lead a delegation to Washington for additional discussions starting on May 8 (12th round of marathon discussions).
Mnuchin said: “The vice premier will come back with his team the following week. I think there is a strong desire from both sides to see if we can wrap this up or move on. The enforcement mechanism is close to done. So I would say that's one of the areas we have made a lot of progress, needs a little bit of fine tuning, but I would say we have a fundamental understanding in that area. The US is really the bright spot of the world, we really see -- we see Europe's falling, we see China's slowing, we still see tremendous amounts of money coming into the U.S. economy and I think it looks very clear for the next year”.
But as per some other report, significant differences remain, including in the area of alleged IP theft. The USTR is not happy with structural issues in trade talks with China.
The USTR noted in a report last week: “Despite a broad government reorganization, including of intellectual-property responsibilities among government agencies, and proposed revisions to IP laws and regulations, China failed to make fundamental structural changes to strengthen IP protection and enforcement, open China’s market to foreign investment, allow the market a decisive role in allocating resources, and refrain from government interference in private sector technology transfer decisions”.
But on Sunday, China hit back, denying the USTR claims. The National Intellectual Property Administration (NIPA) Director said: “Over 5600 people in some 3300 cases were arrested for IP rights infringement in 2018. Some countries’ criticisms of China’s IP protection lack evidence and are non-specific. China has some problems and we are stepping up efforts to fix them. But meanwhile, IP infringement is a global problem that exists in every country. Every country should try to improve its business environment and fix their problems, instead of window dressing”.
On China trade deal, Kudlow said on Monday: “I am still cautiously optimistic about the prospect of US-China trade deal and tariff and non-tariff barriers, IP theft, and technology transfer are all on the table for China trade talks”. When asked if Trump will meet with China's Xi, Kudlow said: “We’ll see”.
On China trade, Kudlow said on Friday (after the US GDP) that the Trump admin will be ‘very aggressive’ in China trade talks with US economy doing so well (as leverage); i.e. the strength of the US economy gives it the upper hand over China over the trade deal.
On Friday Kudlow said in an interview: “China’s economy is slumping and has been for quite some time. The U.S. economy, as I say, is in this prosperity cycle with no end in sight. So we believe that does give us some leverage if you will. Because of our strength and because China needs to open its economy to better its growth outlook ... we will be very aggressive. The headway in the negotiations is pretty good, but I guess — and I think the president would agree with this — they need a good deal more than we need a good deal. But we would like a deal that works for both countries and increases economic growth for both countries”.
On Monday, the blue-chip Dow Jones Industrial Average (DJ-30) ticked up +0.04% to close around 26554.39, near the mid-levels of session low-high of 26520.75-26602.54 in a day of rangebound trade. The broader S&P 500 (SPX-500) edged up +0.11% to close around 2943.03, almost at the mid-point of session low-high of 2939.35-2949.52 (also scaled a new lifetime high). The tech-heavy Nasdaq Composite (IXIC) inched up +0.19% to close around 8161.85, near the mid-levels of session low-high of 8136.41-8176.08 in a day of rangebound trade.
Overall, the US market was helped by banks & financials, led by Bank of New York Mellon (NYSE:BK) and Citigroup (NYSE:C), but Goldman Sachs (NYSE:GS) underperformed on the 1MDB scandal and dragged Dow. Apple (NASDAQ:AAPL), GE helped, while Intel (NASDAQ:INTC), AMD dragged. Restaurant Brands plunged on earnings miss amid a surprise drop in Tim Hortons sales, while Spotify (NYSE:SPOT) Technology closed almost flat amid earnings miss and an upbeat subscribers addition to its premium services. Air conditioner maker Ingersoll-Rand jumped after a report that Gardner Denver Holdings is nearing a deal to acquire a subsidiary of the company (Ingersoll). Energies helped as oil recovered from Trump tantrum on Libyan tensions and no indication of any production hike by OPEC+.