U.S. Opening Bell: WTI Hits Record Losses; USD Drops; Futures Rebound

Key Events

European shares along with futures on the S&P 500, Dow and NASDAQ 100 pared some of yesterday’s losses on optimism for a resolution to the US-China trade dispute, even as stocks in Asia mostly declined.

The STOXX Europe 600 climbed higher for the first time in three days, helped by miners and travel firms.

The FTSE was up by 0.2 percent, buoyed largely by a 6.5 percent boost to shares in Vodafone (LON:VOD). New CEO Nick Read announced that the mobile operator planned to reduce operating costs by up to 1.2 billion euros by 2021, freeing up cash flow. A rally in the pound prevented the London index in sharing in the same gains as its European counterparts.

Earlier, Asian trade was mixed. All major averages in the region except for China's Shanghai Composite fell at the open, following Wall Street’s tech slump during yesterday's US trade, which was exacerbated by news of falling demand for Apple's (NASDAQ:AAPL) iPhones.

Most indices, however, recovered on reports that China’s Vice Premier Liu He will visit the US to kick-start talks. Japan’s Nikkei 225 opened 1.7 percent lower, underperforming its regional peers, extended the drop to 3.53 percent, but eventually managed to trim losses to 2.06 percent. Conversely, the Shanghai Composite opened 0.28 percent higher and kept gaining ground, to close 0.93 percent in the green, near the top of the session.

Global Financial Affairs

Yesterday, US stocks started the month on the wrong foot, as all major indices tumbled about 2 percent, with the NASDAQ Composite nearing the 3 percent mark. All major averages also closed near the bottom of the session, as there were no takers on the dip, and each suffered a three day slide, except for the Dow Jones Industrials, which dropped for a second day.

The S&P 500 slipped 1.97 percent lower, for a combined three day loss of 3.12 percent. Every sector except for Real Estate (+0.21 percent) closed in negative territory. Technology (-3.52 percent) led the declines, after Lumentum Holdings (NASDAQ:LITE), a major Apple supplier, said demand for iPhones was waning. Technically, the price fell back below its uptrend line since the February 2016 bottom as well as the 200 DMA.

Apple took a 5.04 percent hit yesterday. The mobile phone and personal computer manufacturer is trading within a falling channel after completing a H&S bottom. The price is $4 away from our target. It also returned to the neckline, as we forecast.

The Dow gave up 602.12 points, or 2.32 percent, for an aggregate 3.06 percent over two days. Technically, while the price fell back below the 50 DMA and 100 DMA, it remains over a full percentage point above the 200 DMA and over 3 percent above the uptrend line since the last correction, in early 2016.

The NASDAQ was the main laggard of yesterday's session and for the current equity rout, giving up 2.78 percent, for a combined three day drop of 5.01 percent. The tech-heavy index was weighed down by Apple's setback.

From a technical perspective, the price extended a drop below the 200 DMA after crossing below it yesterday. The 50 DMA crossed below the 100 DMA. The price is still about 3 percent above its uptrend line since the end of the previous, February 2016 correction.

The Russell 2000 lost 1.53 percent, for a total three day decline of 4.01 percent. Technically, the small cap index is 6 percent below its 200 DMA and 7.5 percent below its uptrend line since the early 2016 low.

The 50 DMA is about to cross below the 200 DMA, executing a Death Cross, a dreaded technical phenomenon, which gets much attention from mainstream Wall Street, not just among technical analysts. It demonstrates that recent prices are weakening over a longer than expected period, in this case four times longer.

In FX markets, the dollar retreated from an 18-month high after reaching the top of its rising channel, with both the 50 and 100 DMAs providing support. Nevertheless, the USD is now trending higher. Traders should wait for a correction to the channel bottom or for an upside breakout. Aggressive traders may risk a short, counting on a correction to the channel bottom.

The Australian dollar and the New Zealand dollar, two countries that rely on China demand, edged higher on the reports that the US-Sino trade tiff could be inching closer to a resolution. The yen, a proxy in times of uncertainty, is ticking lower. That, however, has become an unreliable indicator of market sentiment, since the dollar has overtaken it as the preferred safe haven currency.

The pound recovered from a three-day loss on reports from both EU and UK negotiators that a Brexit deal may be sealed in a matter of days. The euro rebounded from hitting the weakest level against the dollar since June 2017, pressured by Italy’s budget headwinds.

The pound was lifted by an unexpected increase in wage inflation following the monthly UK employment report. The pound continued its rally despite an unexpected rise in the unemployment rate from 4.0 percent to 4.1 percent in the three months to September, however he average earnings index excluding bonuses grew by 3.2 percent, beating forecasts of 3.1 percent.

Oil slid below $60 after a 12-day decline, hitting its longest losing streak on record after falling into a bear market—defined as a 20 percent setback from the recent peak—last week. Selling built up after US President Donald Trump tweeted that the Saudi Arabia and OPEC proposed supply cuts were insufficient. The two main culprits appear to be the outlook for reduced demand, due to signs of a global economic slowdown, and rising US production. As of now, it seems that OPEC can’t tame the price declines. The WTI price reached the lowest level since February and is set to close at the lowest level since November 2017. Technically, the price found support by the November 2017 peak-February 2018 trough.

While Apple received much of the attention, global growth risks and the Fed's tightening path may also have played a role in yesterday’s selloffs. While US economic data is positive, figures from Europe and China are not equally upbeat. As to higher interest rates, it appears that investors’ continuous selling may also be a reaction to what they perceive as an unfavorable pace of tightening for companies as well as shareholders.

The Fed on the other hand doesn’t seem too concerned about investor worries. San Francisco Fed chief Mary Daly said she backs “gradual normalization of monetary policy,” supporting rising rates. Daly added that a market correction is healthy for stocks with overly high valuations.

Up Ahead

• Tuesday marks the deadline set by the EU for Italy to revise its budget.
• Chinese industrial production and retail sales data due Wednesday.
• Also on Wednesday, Fed Chairman Jerome Powell discusses national and global economic issues with Dallas Fed President Robert Kaplan at an event hosted by the Dallas Fed.
• US consumer inflation probably rebounded in October after easing in September. CPI data is projected to show a 0.3 percent increase on Wednesday.
• Policy decisions are coming from central banks in Mexico, Philippines, and Thailand.

Market Moves

Stocks

• The FTSE rose 0.2 percent.
• Futures on the S&P 500 rose 0.6 percent.
• The STOXX Europe 600 gained 0.5 percent.
• The MSCI All-Country World Index gave up 0.1 percent to the lowest level in almost two weeks.
• The MSCI Emerging Market Index climbed 0.1 percent.

Currencies

• The British pound gained 0.9 percent to $1.296.
• The Dollar Index gave up 0.15 percent.
• The euro gained 0.1 percent to $1.1229, the first advance in a week.
• The Japanese yen lost 0.2 percent to 114.11 per dollar, the weakest level in almost six weeks.
• The MSCI Emerging Markets Currency Index ticked 0.1 percent higher.

Bonds

• The yield on 10-year Treasuries declined one basis point to 3.17 percent, the lowest level in more than a week.
• Germany’s 10-year yield climbed less than one basis point to 0.40 percent.
• Britain’s 10-year yield increased one basis point to 1.461 percent.
• The spread of Italy’s 10-year bonds over Germany’s rose three basis points to 3.0655 percentage points to the widest in two weeks.

Commodities

• The Bloomberg Commodity Index gained 0.5 percent, the biggest climb in more than a week.
• West Texas Intermediate crude slipped 1.2 percent to $59.22 a barrel, hitting the lowest level in eight months with its 12th straight decline.
• LME copper gained 1.7 percent to $6,149.50 per metric ton, the biggest rise in more than a week.
• Gold climbed 0.1 percent to $1,201.96 an ounce, the first advance in more than a week.