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Index Futures Fall as Trade War Triggers Recession Fears

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Monday, August 12, 2019

U.S. stock futures plunged ahead of trading on Monday on concerns that the lingering trade war between the United States and China could push the global and domestic economies into a full-blown recession. The Dow lost around 150 points after Hong Kong International Airport terminated all departures for the rest of the day following intensification in protests which have paralyzed the city.

Since June, violent demonstrations by pro-democracy groups have created the worst crisis witnessed by the Asian financial capital in decades. The protests are also the stiffest challenge faced by Xi Jinping since he assumed office in 2012. These protests are one of the factors pushing treasury yields lower this morning.  

Ahead of the opening, consumer staples company Sysco (SYY - Free Report) and Barrick Gold (GOLD - Free Report) released fiscal fourth-quarter and second-quarter earnings, respectively. Sysco beat earnings estimates though revenue numbers fell short of expectations. Meanwhile, Barrick Gold’s earnings and revenues failed to exceed their respective estimates.

Wall Street closed sharply lower on Wednesday on heightened trade tensions. Concerns about an impending global economic slowdown also kept investors away from equities. Extreme volatility dented investors’ confidence. All three major stock indexes closed in the red. For the week as a whole, indexes finished in negative territory.

The Dow Jones Industrial Average (DJI) declined 0.3% to close at 26,287.44. The S&P 500 tumbled 0.7% to close at 2,918.65. Meanwhile, the Nasdaq Composite Index closed at 7,959.14, shedding 1%. The fear-gauge CBOE Volatility Index (VIX) increased 6.3% to close at 17.97. Total weekly share trade volume exceeded 41 billion, marking the biggest weekly total of 2019 so far. Decliners outnumbered advancers on the NYSE by a 1.99-to-1 ratio. On Nasdaq, a 2.07-to-1 ratio favored declining issues.

The Dow closed in negative territory with 22 components of the 30-stock blue-chip index closing in the red while eight finished in the green. The S&P 500 also finished in the red. The Technology Select Sector SPDR (XLK), Communications Services Select Sector SPDR (XLC) and Energy Select Sector SPDR (XLE) lost 1% each.

Notably, nine out of 11 sectors of the benchmark index closed in the red while two ended in the green. The Nasdaq Composite declined for the day due to weak performance of semiconductor stocks.

On Aug 9, President Donald Trump said that the United States was in no hurry to seal a deal with China although discussions between the two sides were continuing. Trump said: “China wants to do something, but I’m not doing anything yet.” He reiterated that he will continue to take stock of the situation and may cancel the next round of talks between high-level delegations of the two countries scheduled in September.

Consequently, shares of Micron Technology Inc. (MU - Free Report) and NVIDIA Corp. (NVDA - Free Report) declined 2.6% each. Both stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

On Aug 7, the central banks of three major emerging markets ---- India, New Zealand and Thailand ---- unexpectedly cut interest rates to combat more aggressively against an impending global recession.  Moreover, the European Central Bank and Bank of Japan are evaluating options to ease monetary conditions further even though both their economies’ key rates are already in the negative zone.

Consequently, investors across the world are gradually shifting toward safe-haven sovereign bonds from risky assets like equities to safeguard their portfolios from a likely slowdown. At the beginning of 2019, the yield on 3-Month bond was hovering around 2.42% while the 10-year security was yield around 2.66%. As of Aug 9, yield on the 10-year bond plummeted to 1.73% while 3-month short-term government bond was yielding 2.05%. According to several economists, this yield curve inversion foreshadows an impending U.S. economic recession.

On Aug 9, the Department of Labor reported that producer price index (PPI) for final demand grew 0.2% in July, in line with the consensus estimate, surpassing previous month’s increase of 0.1%. Year over year PPI increased 1.7%, flat with June’s growth rate. However, core PPI (excluding the volatile food, energy and trade services items) declined 0.1% in July, marking its first decline since October 2015. Year over year, core PPI rose 1.7% compared with 2.1% in June.

Last week was a disappointing one for Wall Street. All three major stock indexes --- the Dow, S&P 500 and Nasdaq Composite --- declined 0.8%, 0.5% and 0.6%. Intensifying trade conflict between the United States and China was the main reason for equity market losses. China decided to impose import duties on U.S. agricultural products and its central bank fixed the mid-point of the yuan to below the psychological level of 7 per U.S. dollar over the past three days.

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