Stocks pared losses after enduring a rollercoaster session ignited after the arrest of a Chinese telecommunications company executive muddled prospects of a U.S.-China trade resolution.
The S&P 500 (^GSPC) fell 0.15%, or 4.12 points, as of market close, with the energy sector leading declines. The Dow (^DJI) slipped 0.32%, or 79.4 points, after losing as many as 784.85 points earlier in the session. The Nasdaq (^IXIC) rose 0.42%, or 29.83 points, breaking into positive territory after spending most of the session in the red.
U.S. equities received some respite on Wednesday with stock and bond markets closed to mark the funeral of former President George H.W. Bush. But Thursday initially saw stocks return to the steep selling that rattled markets on Tuesday, which had sent the Dow tumbling by nearly 800 points.
A plummet in equity futures preceded Thursday’s session, with S&P 500 futures falling about 1.8% on higher-than-average volume when futures trading reopened at 6 p.m. ET on Wednesday. The CME Group, an options and futures exchange operator, paused trading in short intervals to stem the decline in futures.
Some are speculating that the catalyst for the plunge came in the wake of reports of the arrest of Meng Wanzhou, the CFO of China’s Huawei Technologies and the daughter of the company’s founder. Meng was arrested in Vancouver, Canada and faces potential extradition to the U.S. for allegedly violating sanctions and conducting illegal dealings with Iran. The arrest took place Saturday – the same day that President Donald Trump and Chinese President Xi Jinping met at the G20 summit in Argentina – but was first reported by Canada’s Globe and Mail on Wednesday.
The arrest throws a wrench in hopes of a speedy trade deal between the U.S. and China. The Chinese embassy in Canada came out sharply against the arrest, calling it a human rights violation. Analysts at Deutsche Bank now believe that the probability that the U.S. and China reach an agreement by March 1 has dropped to 30% from 40%.
“Public opinion in China will likely become more negative in respect to the trade war, and potentially against US companies,” Deutsche Bank analyst Zhiwei Zhang wrote in a note Thursday. “The trade talk has just been resumed at the G20 meeting; now its outlook has darkened.”
The recent market volatility could signal Federal Reserve officials to temper plans for additional quarterly rate hikes after their meeting in December, according to a Wall Street Journal report Thursday. Federal Reserve officials have asserted that they will remain “data dependent” in determining the path forward for monetary policy, leaving flexibility for the central bank to respond to economic and market conditions.
Although statements from policymakers in interviews and in releases suggest they believe the U.S. economy is still relatively solid, inflation has softened recently, and falling oil prices point to potential future declines in growth. On Thursday, Federal Reserve President Raphael Bostic said he believes “we’re within shouting distance of neutral,” indicating that the Fed may not need to go much further to find a medium between slowing and overheating the economy.
Meanwhile, oil prices slid Thursday as oil ministers of OPEC gathered for a meeting in Vienna, Austria to discuss output. Attendees decided to delay a decision on production until after meeting with other producers on Friday. Saudi Energy Minister Khalid al-Fahlih previously signaled that the new round of production cuts may come in less-than-expected at a 1 million barrel per day reduction, versus the 1.2 million to 1.4 million barrel per day cut that markets had factored in.
U.S. West Texas Intermediate crude prices (CL=F) slipped 2.7% to settle at $51.49 per barrel. Futures for the February contract of ICE Brent crude, the international benchmark, (BZ=F) settled lower by 2.43% to $60.06 per barrel.
NEW YORK, Dec. 4, 2018 — Traders work at the New York Stock Exchange in New York, the United States, Dec. 3, 2018. U.S. stocks closed higher on Monday. The Dow Jones Industrial Average increased 287.97 points, or 1.13 percent, to 25,826.43. The S&P 500 increased 30.20 points, or 1.09 percent, to 2,790.37. The Nasdaq Composite Index was up 110.98 points, or 1.51 percent, to 7,441.51. (Xinhua/Wang Ying) (Xinhua/ via Getty Images)
STOCKS: Shares of Huawei Technologies suppliers fall following Meng Wanzhou’s arrest
The arrest of Meng Wanzhou rattled suppliers to the Chinese tech company, sending their shares tumbling. U.S. NeoPhotonics (NPTN), which carries 47% revenue exposure to Huawei Technologies, slumped about 16% to $6.48 per share as of market close. Taiwan Semiconductor Manufacturing Company (TSM) with 8% revenue exposure fell 1.59% to $36.84 per share. U.S. chipmakers also slipped, with the iShares PHLX Semiconductor ETF (SOXX) lower by 0.54%.
Guggenheim Securities initiated coverage of Facebook (FB), Twitter (TWTR), Snap (SNAP) and Alphabet (GOOG, GOOGL). The firm gave Facebook a neutral recommendation and a price target of $150, or about 8.8% upside from the last close. Guggenheim rated both Twitter and Alphabet as Buy, with the firm asserting that the former’s efforts to clean up fake accounts will help increase usage and bring on advertisers. Guggenheim rated Snap as new Neutral with a price target of $6, or 3.4% lower than the last closing price.
Thor Industries (THOR), which makes recreational vehicles, reported quarterly net sales below consensus estimates, sending shares falling. Net sales came in at $1.76 billion for the fiscal first quarter of 2019, below estimates of $1.91 billion. Gross margin was narrower than expected at 11.8% versus 12.6%. The company noted that quarterly results were “significantly impacted by acquisition-related costs” that totaled $57.1 million. Shares of Thor fell 6.17% to $60.34 each as of market close.
ECONOMY: U.S. trade deficit widens to a 10-year high
The U.S. trade deficit jumped to a 10-year high in October, increasing 1.7% to $55 billion, the Commerce Department said in a report Thursday. The trade gap has widened for five consecutive months. Trade data for the total September trade deficit was upwardly revised to reflect a $54.6 billion trade deficit. The trade deficit with China, a focal point of U.S.-Sino tensions, jumped 7.1% to a record $43.1 billion in October, from $40.2 billion in September. was mainly driven by a further plunge in exports to China, and suggests that net trade will once again be a drag on GDP growth in the fourth quarter.
Andrew Hunter, U.S. economist for Capital Economics, wrote in a note the widening deficit “was mainly driven by a further plunge in exports to China, and suggests that net trade will once again be a drag on GDP growth in the fourth quarter.”
Factory orders decreased by 2.1% in October, the Commerce Department reported Thursday, versus consensus expectations of a 2% decrease, according to Bloomberg data. This reverses a 0.2% increase in factory orders in September. New orders for manufactured durable goods also fell in October for the third time in the last four months, down 4.3% versus expectations of a 2.4% decrease. Transportation led total durable goods orders lower, posting a 12% decrease. New orders for manufactured durable goods excluding transportation rose 0.2% in October.
Initial jobless claims fell during the week ending November 24 but came in higher than consensus estimates, based on the Department of Labor’s latest weekly report. Initial unemployment claims fell by 4,000 to 231,000 for the week, while consensus expectations were for new claims to come in at 225,000. Continuing jobless claims, however, were lighter-than-expected at 1.631 million versus estimates of 1.69 million.
Nonfarm private sector employment grew by 179,000 jobs in November, according to the latest monthly report from ADP National Employment. This fell short of the 195,000 new jobs expected by economists polled by Bloomberg, and decreased from the month-priors addition of 225,000 new jobs.
Nonfarm business labor productivity increased in-line with estimates, coming in at a pace of 2.3% in the third quarter of 2018, according to final data from the U.S. Bureau of Labor Statistics. This represented a 10-basis point increase from the previous preliminary estimate. Nonfarm unit labor costs increased 0.9% to represent a 3.1%-increase in hourly compensation and a 2.3% increase in labor productivity, falling slightly short of estimates of a 1% unit labor cost increase.
Economic activity in the non-manufacturing sector grew in November, according to ISM’s non-manufacturing report on business. The headline reading came in at 60.7 for the month, up from 60.3 in October and ahead of expectations of 59, according to Bloomberg analysts.
“For all the turmoil in financial markets, the message from the incoming survey data is that the economy is still growing at a strong pace,” Michael Pearce, senior U.S. economist for Capital Economics, wrote in a note Thursday. “The small rise in the non-manufacturing ISM index in November leaves it consistent with an acceleration in economic growth.”
