Dow futures drop 100 points, as doubts over U.S.-China trade deal emerge

Dow futures traded solidly lower Tuesday, pointing to a downbeat session for the major benchmarks, as investors reassess a weekend detente in tariff tensions between the U.S. and China.

How are the benchmarks faring?

Dow Jones Industrial Average futures YMZ8, -0.34% fell 113 points, or 0.4%, to 25,731, while S&P 500 futures ESZ8, -0.24% dropped 9.45 points, or 0.4%, to 2,781. Nasdaq-100 futures NQZ8, -0.33% fell 37 points, or 0.5%, to 7,021.50.

What’s driving the market?

Skepticism surrounding the U.S. and China’s ability to achieve a concrete deal to avoid new, or expanded, bilateral tariffs is rising, as investors focused on the lack of specific concessions made by China at last weekend’s G-20 meeting in Argentina, where President Trump and Chinese leader Xi Jinping met.

While the U.S. agreed to 90-day moratorium on threats to raise tariffs on more than $200 billion in annual imports to 25% from 10%, a comparison of official statements from Chinese and U.S. officials suggests there may be a long way to go before the two camps are able to come to an agreement that can ease tensions more permanently.

Meanwhile, confusion spread Monday night over when exactly the 90-day timeline would begin, after White House economic advisor Larry Kudlow mistakenly stated that the negotiating window would begin on Jan. 1 of 2019. The White House later put out a correction, stating that it began on Dec. 1.

Also on the minds of equity investors is the flattening of the U.S. yield curve, as yields on government debt continued fall Tuesday. On Monday, the yield on five-year government debt fell below the yield on three-year debt, a phenomenon which has preceded previous recessions, and an indicator that investors are more confident about current than future economic growth as the Federal Reserve raises rates.

A more widely followed spread, that between the 2-year yield TMUBMUSD02Y, +0.29% and the 10-year rate TMUBMUSD10Y, -0.64% tightened to 13.3 basis points, its narrowest in 11 years. This ratio is a popular gauge of future economic growth, and if the 10-year yield falls below the two-year, it will raise significant concerns of an impending recession.

What stocks are in focus?

Apple Inc. AAPL, -2.00% shares are falling more than 2% in premarket action, after the stock was one of the leaders of Monday’s rally, when it rose 3.5%.

Dollar General Corp. stock is falling 6% in premarket trade, after the company cut its 2018 earnings outlook, though it beat estimates for third-quarter revenue in a Tuesday morning earnings release.

Shares of AutoZone Inc. AZO, +5.28% are in focus, after the company reported fiscal first-quarter earnings and same-store sales growth that beat Wall Street estimates. The stock is up nearly 5% before the bell Tuesday.

What are market participants saying?

The boost to global risk appetite following the US-China trade “cease-fire” seems to have been short-lived. Even though US stock markets closed higher, they did surrender a decent part of their gains late in the session, and futures tracking the likes of the S&P 500 are pointing to a notably lower open today,” wrote Marios Hadjikyriacos, investment analyst at U.k. brokerage XM.com.

The major underlying story this morning is the yield curve as the 2’s-10s spread compressed to new lows overnight (13bp) and the 2’s-5’s actually inverted,” wrote Tom Essaye, president of the Sevens Report, in a Tuesday morning note to clients.

The movement in the bond markets “underscores growth concerns,” for equity investors, he wrote.

How did markets trade yesterday?

On Monday, The Dow DJIA, +1.13% rose 287.97 points, or 1.1%, to 25,826.43. The S&P 500 SPX, +1.09% climbed 30.20 points, or 1.1%, to 2,790.37. That is the large-cap index’s strongest opening session for December, percentage wise, since it rallied 2.16% on Dec. 1, 2010, according to FactSet data.

The Nasdaq Composite Index COMP, +1.51% gained 110.98 points, or 1.5%, to 7,441.51.

How are other markets trading?

Asian markets traded mostly lower on Tuesday, with Japan’s Nikkei NIK, -2.39% falling 2.4%, while markets in South Korea SEU, -0.82% and Australia XJO, -1.01% also finished down. China’s Shangh, Composite Index SHCOMP, +0.42% rose a modest 0.4%.

In Europe, markets are also falling broadly, as the Stoxx Europe 600 SXXP, -0.34% has shed 0.6%, while the FTSE 100 UKX, -0.39% is retreating 0.7%.

Crude oil CLF9, +1.25% rallied Tuesday, rising 1.9% ahead of OPEC meeting this week where production cuts are expected. Gold prices GCG9, +0.46% are up 0.4% Tuesday, while the DXY, -0.33% is retreating 0.6%.

 

/marketwatch.com

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