The U.S. stock market closed mixed Monday as Dow closed flat on hopes of rate cuts by the Fed, but S&P inched down and Nasdaq rattled on big tech anti-trust regulatory woes. On mid-Monday, Dow crumbled over -200 points from the session high on simmering China cold war tensions and antitrust investigations for Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL). As per reports, the FTC is taking serious steps on an anti-trust and business practice investigation into Facebook and preparing to levy a massive fine against Facebook for data privacy violations. The FTC has also secured jurisdiction over the anti-trust probe into Facebook, suggesting that the agency is considering even more rigorous scrutiny.
The report also suggested that the FTC also has jurisdiction over an anti-trust probe into Amazon (NASDAQ:AMZN), as the FTC and DOJ divide up the anti-trust push not on a company by company, but on an issue-by-issue, basis. There was also another report on DOJ's probe into Google, which will reportedly focus on its advertising and search businesses. The DOJ has been given jurisdiction for potential probe of Apple (NASDAQ:AAPL) as part of broad tech review by antitrust enforcing agencies.
Meanwhile, on early Monday, Dow Future tumbled almost -200 points on lingering suspense about U.S.-China trade truce after China clarified its stance and released a white paper on trade discussions. China published details of its trade stance with the U.S. over the weekend in a move that suggested China is not fearful for a prolonged trade/cold war with the U.S. The white paper also included plans for a so-called Unreliable Entities list of U.S. companies, similar in nature to a collection of Chinese companies targeted by the U.S. Commerce Department, in the coming weeks. There also was a suggestion that officials would investigate FedEx (NYSE:FDX) after executives at Huawei alleged it of deliberately mishandling packages.
China's Vice Commerce Minister Wang Shouwen said: "If the U.S. side wants to use extreme pressure, to escalate the trade friction, to force China to submit and make concessions, this is absolutely impossible. During the (trade) consultations, China has overcome many difficulties and put forward pragmatic solutions. However, the U.S. has backtracked, and when you give them an inch, they want a yard”.
Overall, China's tough stance on trade and a warning from Chinese Defense Minister Wei for the U.S. not to meddle in the country's decades-long dispute with Taiwan triggered a new wave of risk aversion.
Basically, China reiterated its known pre-conditions/stance for resuming stalled trade talks with the U.S. in its white paper. China’s highly anticipated white paper on trade discussions with the U.S. was quite strong. In short, China blamed the U.S. for starting trade conflicts. And, it criticized the US for going back on what’s agreed three times. And it holds the U.S. totally responsible for the collapse of trade negotiation. China also reiterated pre-conditions on resuming trade negotiations. First, both sides have to respect each other’s social, economic system, development path, and rights. Secondly, the negotiation has to be based on integrity. Thirdly, China will not step back on its principles, including sovereignty.
The implications are quite clear that China will not do anything to change its own development path along with the socialist market economy (state capitalism). In other words, China will not retreat from subsidizing State-Owned Enterprises (SOE). Secondly, the implementation of the agreement should be under full control of the sovereign entity. That is, for example, China will decide what new laws to pass to curb IP theft, or it will fulfill the commitment with administrative measures. China will object to U.S. instructions on what is to be done exactly.
But Dow Future recovered by over +200 points on hopes of an ultimate truce between the U.S. and China after the US Secretary of State Pompeo, a known China hawk said the U.S. is trying to level the playing field with China.
Meanwhile, Trump was in the U.K. and tweeted about China tariffs, justifying his tariffs: “China is subsidizing its product in order that it can continue to be sold in the USA. Many firms are leaving China for other countries, including the United States, in order to avoid paying the Tariffs. No visible increase in costs or inflation, but the U.S. is taking Billions!”
In any way, in an apparent blow to the U.S. education industry, China has issued warning on the risk of studying overseas after a report that the U.S. may restrict/shorten Chinese visa limits.
In another development, on the weekend, the White House economic adviser Hassett quits, apparently in protest against Trump’s Mexican tariffs.
Trump tweeted late Sunday from the Airforce One: “Kevin Hassett, who has done such a great job for me and the Administration, will be leaving shortly. His very talented replacement will be named as soon as I get back to the U.S. I want to thank Kevin for all he has done - he is a true friend!”
But the market has a sigh of relief when Hassett said it wasn't related to Mexico tariffs. Hassett said: “The near term impact (of Trump tariffs) will be more on Mexico than the U.S.” Regarding his exit, Hassett also clarified it as pre-planned: "This is something that's been in the works for a little while---It's very normal for the CEA chair to move on after two years".
In any way, there is the concern of high profile exit from the White House (Trump admin) as a fallout of Trump’s bellicose Mexican tariffs. As per some report, the White House CEA/NIC Kudlow may also quit on Trump’s tariff policies. He was on Trump’s ire a few months ago after saying that both sides will suffer on Trump’s China tariffs and since then Kudlow was notably absent from speaking publicly to the media. Kudlow was seen as a trade policy moderate (dove) and a good communicator, friendly to the Wall Street in Trump admin.
Now, in the absence of Kudlow, trade/policy hawk Navarro is often seen clarifying Trump’s economic/trade decisions in the media and the market is concerned that Trump may abandon his “love for Dow” for the sake of his bellicose trade and other policies.
On Sunday, Trump tweeted from Airforce One about his Mexican tariffs and urged them to stop illegal immigration: “Mexico is sending a big delegation to talk about the Border. Problem is, they’ve been ‘talking’ for 25 years. We want action, not talk. They could solve the Border Crisis in one day if they so desired. Otherwise, our companies and jobs are coming back to the USA!”
On late Monday, Dow recovered from the session low on hopes of rate cuts by the Fed late 2019 after Bullard, a known dove said: “Rate cut may be warranted soon on trade and inflation risks and trade dispute may have a larger impact on global markets. The inversion in bond rates now also supports the case for lower interest rates, while trade uncertainty means expected slowdown in U.S. growth may be even sharper than anticipated and thus a rate cut may also give insurance on an economic slowdown. The market is telling us that current rates are too high”.
Bullard further urged the Fed to cut rates to achieve the 2% inflation (core PCE) target on a sustainable basis as it was elusive for almost last 6-years.
The St. Louis Fed head Bullard clarified: “The 2% inflation target has become an international standard and let’s hit & maintain it. The Fed has a good balance sheet plan, no need to mess with it. The U.S. Treasury yields are quite a bit higher than others and global rates climate is important to factor for the Fed”.
Bullard said: “A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown. The direct effects of trade restrictions on the U.S. economy are relatively small, but the effects through global financial markets may be larger. Even if the sharper-than-expected slowdown does not materialize, a rate cut would only mean that inflation and inflation expectations return to target more rapidly”.
Notably, Bullard is the first influential Fed official this year, has publicly suggested the need for a rate cut to boost inflation. Subsequently, USD slumped and U.S. stocks got some boost. The U.S. 10Y bond yield plunged to a low of 2.061%, lowest since September 2017.
The FFR is now pricing almost 1 rate cut by Dec’2019 and 2 more by Dec’2020. But eventually, the U.S. stock market faded the Bullard boost after a report that the U.S. regulatory body (FTC/DOJ) is also exploring anti-trust investigation for Apple. There was also a report that Mexico may impose retaliatory tariffs on U.S. exports if Trump tariffs are applied on Mexican exports.
On Monday, the blue-chip Dow Jones Industrial Average (DJ-30) ticked up +0.02% to close around 24819.78, almost at the mid-point of session low-high of 24680.57-24935.21 in a day of volatile trading. The broader S&P 500 (SPX-500) inched down -0.28% to close around 2744.45, almost at the mid-point of 2763.07-2728.81 in a day of moderate volatility. The tech-heavy Nasdaq Composite (NQ-100) tumbled -1.61% to close around 7333.02 after making a session low-high of 7292.22-7457.66 in a day of volatile trading.
On Monday, the U.S. market was dragged by techs (Apple, Alphabet-Google and Microsoft (NASDAQ:MSFT)), industrials, healthcare (United Health), financials (Visa (NYSE:V)), consumer discretionary (Amazon) and communication services (Facebook), while helped by basic materials, telecoms (Verizon (NYSE:VZ)) and energies (oil rebounds) to some extent.
On Monday, the overall U.S. market sentiment was also undercut by soft manufacturing PMI, construction spending and ISM manufacturing PMI, while helped by an upbeat ISM manufacturing employment for May.
Technical Outlook: SPX-500, DJ-30, NQ-100:
Technically, whatever may be the narrative, SPX-500 now has to sustain over 2800 for a rebound to 2820/2855*-2875/2900* and further rally to 2930/2950-2965*/2990 and 3020/3050*-3080/3135 in the near term (under bullish case scenario).
On the flip side, sustaining below 2790, SPX-500 may fall to 2755/2745*-2720/2695* and could further plunge to 2665/2635-2590*/2565 in the near term (under bear case scenario).
Technically, whatever may be the narrative, DJ-30 now has to sustain over 25250 for a recovery 25500/25750*-25850/26000* and further rally to 26100*/26300-26550/26705* and further 26850/26955*-27050*/27400 in the near term (under bullish case scenario).
On the flip side, sustaining below 25200, DJ-30 may further fall to 25100*/24850-24500*/24250 and 24150/24000-23700/23300 in the near term (under bear case scenario).