Morning Minutes 12/10/2018

Markets Retreat in Reaction to China’s Big Trade Surplus and Brexit Turmoil

December 10, 2018
8:45 am EDT

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Market Commentary By:
Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

Investors still considering whether to take tax losses appear to have found more reasons to head for the door this morning as Friday’s big selloff that saw the Dow fall 558 points or 2.25% and the NASDAQ drop over 3.0% continues. In Asia this morning where investors had their first chance to react to Friday’s weaker than expected US nonfarm payrolls report, the Nikkei fell 2.1% while Hong Kong and Shanghai both fell 1.1%.

Commodities are trading lower today with copper down 0.8% and WTI crude oil down 1.4%. It’s didn’t take long for Friday’s OPEC+ planned production to get priced in as focus turned back to the potential impact of worsening US-China trade tensions continues to drag on the outlook for resource demand. Adding to the confusion over what the two parties agreed to at the recent G-20 summit, and concerns over what the arrest of Huawei’s CFO could have on future negotiations, over the weekend China reported a big $44.75B trade surplus for November, way above the $34.0B surplus that had been expected, throwing gasoline on the fire.

Meanwhile over in Europe, Brexit chaos continues to weigh on markets. Reports that UK PM May is about to postpone or cancel tomorrow’s planned vote on her Brexit deal has the British Pound down 0.5% against the US Dollar and the FTSE posting a small gain. Over the weekend, the European Court of Justice ruled that the UK can cancel Article 50 unilaterally if needed adding to the uncertainty over what could happen next. Major indices on the continent are running down about 0.5% as France continues to be rocked by political turbulence and tax protests.

Amid all of the bearishness, US indices have been quietly improving. When I first looked at the Dow Futures a couple of hours ago, they were down about 80 points, but have recently climbed up to flat. Friday was the kind of rout that suggests we could be close to a washout. On Friday, all 30 Dow stocks went down, 96 of the 100 stocks in the S&P 100 went down, 99 or the 100 stocks in the NASDAQ 100 went down. In Canada Friday, only 47 of the 60 stocks in the S&P/TSX 60 went as resource sectors cushioned the blow. Of the 13 stocks in the S&P/TSX 60 that went up Friday, 5 were related to mining and 4 were related to energy.

For investors wondering when the pain of tax loss selling season may end and when we could potentially see a Santa Claus Rally start, intraday action could be particularly telling. Though the bear market of the last several months, we have seen a number of days where US indices started out in the green than fell off hard during the day and closed down significantly, indicating that any attempt at a rebound was running into a wall of selling. One way we’ll be tracking to see when the bears are exhausted is if we start seeing days where markets start out down then reverse to the upside through the day to finish positive. Slight gains would be more constructive at this point as we’ve seen too many relief spikes lately that flame out as fast as they soar.

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