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U.S. markets showed continued weakness on Thursday as hopes of a trade dispute resolution with China took an unexpected back step.

The prospects of a heightened tariff war was back in focus following the arrest of a major CFO from a Chinese Tech company.

While the White House knew of the arrest over the weekend, it caught the market by surprise with heavy selling on the open.

The second half rebound off the lows was slightly encouraging despite the VIX pushing prior October peaks.

The Dow was down 0.3% following the pullback to 24,242. Major and lower support at 24,300-24,250 held with risk to 24,000 and late June lows on continued selling pressure.

The Nasdaq was up 0.4% despite trading to an intraday low of 6,984.

Late November support at 7,000-6,950 held with the index erasing a 174-point decline to close just below the 7,200 level.

The S&P 500 was off 0.2% after testing a session low of 2,621 while closing just below the 2,700 level.

Prior support at 2,625 held with risk to 2,600 and fresh October lows on a close below the latter.

The Russell 2000 also slipped 0.2% following the backtest to 1,442. Prior and upper February support at 1,450-1,440 was breached but levels that held into the close.

Real Estate led sector strength after rallying 2.7%.

Communication Services was up 0.5%.

Energy was the the worst performing sector after giving back 1.8%. Materials and Financials were lower by 1.4%.

Global Economy – European markets settled lower as weaker-than-expected German trade data and trade concerns weighed on sentiment.

The Germany’s DAX 30 was down 3.5% and the Belgium20 sank 3.4%. France’s CAC 40 tanked 3.3% and UK’s FTSE 100 fell 3.2%. The Stoxx 600 Europe plummeted 3.1%.

The German September trade balance was in surplus 18.4 billion euros, narrower than expectations of 20 billion euros. September exports slipped 0.8%, weaker than expectations for a rise of 0.4%.

September imports fell 0.4%, missing forecasts for a gain of 0.8%.

Asian markets closed mostly higher despite news that a major Chinese company CFO has been arrested, reportedly on suspicion of violating U.S. sanctions.

The concern is that the arrest will complicate trade talks between the U.S. and China as the U.S. has been telling allies not to use the company’s products.

Japan’s Nikkei jumped 1.8% and South Korea’s Kospi rose 0.6%. Australia’s S&P/ASX 200 added 0.5%. Hong Kong’s Hang Seng climbed 0.3% while China’s Shanghai slipped 0.2%.

The China October trade balance was in surplus by $34.01 billion, narrower than forecasts of $35.15 billion.

October exports rose 15.6% year-over-year, topping expectations of 11.7%. October imports rose 21.4% year-over-year, stronger than estimates of 14.5%.

Japan September core machine orders plunged by a record 18.3%, weaker than expectations for a decline of 9%.

Challenger Job-Cut Report announced layoffs were at 53,073. Announced job cuts are up 51.5% year-over-year versus October’s 153.6% and total 494,800 year to date.

Announced hirings rose 15,400, with 6,300 in retail.

November ADP Employment Report came in at 179,000, topping forecasts of 175,000.

Jobless Claims checked in at 231,000, versus estimates of 225,000. This brought the 4-week average to 228,000 from 223,750.

Continuing claims dropped 74,000 to 1,631,000.

October International Trade in Goods deficit widened 1.7% to $55.5 billion. Exports dipped 0.1% versus the 1.5% September bounce.

Imports edged up 0.2% after the prior 1.5% gain. The real goods deficit was $87.9 billion versus $87.2 billion, with exports dropping 0.8% from 2% and imports sliding to 0.2% from 1.6%.

Excluding petroleum, the trade balance widened to $52.6 billion from $50.1 billion.

The deficit with China widened further to $43.1 billion from $40.2 billion and was at $1.9 billion with Canada, up from $1.8 billion.

Q3 nonfarm productivity was revised up to a 2.3% growth rate versus the 2.2% pace from in the advance report, and compares to 3% in Q2 and 0.3% in Q1.

Unit labor costs were nudged down to 0.9% versus 1.2% in the prior report, and compares to -1% in Q2 and 3.4% in Q1. Q3 output was left at 4.1%, where it was initially, while employee hours were also unrevised at 1.8%.

Compensation per hour was 3.1% last quarter versus the preliminary 3.5%. Real compensation was 1.1% versus 1.4%. The price deflator slipped to 1.3% versus 1.4%.

On a 12-month basis, productivity was steady at 1.3% year-over-year versus the preliminary and Q2, with unit labor costs at 0.9% from the preliminary 1.5% and 1.4% year-over-year in Q2.

November PMI Services Index was at 54.7, topping estimates of 54.4. The employment component fell to 54.7 while composite PMI slipped 0.2 points to 54.7.

The employment index also dipped to 53.3 from 53.8 previously.

October Factory Orders were down 2.1%, missing forecasts for a drop of 2% for the month.

Durable orders were revised to minus 4.3% versus the 4.4% drop in the advance report.

Transportation orders declined 12% after a 0.9% gain previously, and excluding transportation, orders were up 0.3% from 0.1%. Nondefense capital goods orders excluding aircraft were unchanged after falling 0.6% preciously.

Shipments were down 0.1% from 0.7%.

Nondefense capital goods shipments excluding aircraft edged up 0.3% from -0.3% while inventories rose 0.1% from 0.6%.

The inventory-shipment ratio was steady at 1.34.

November ISM Non-Manufacturing Index came in at 60.7, topping expectations of 59.

This represented the third straight month abobe the 60 level, and is close to record highs.

The employment component dipped to 58.4 from 59.7. New orders improved to 62.5 from 61.5.

New export orders fell to 57.5 from 61 while imports climbed to 54.5 from 51. Prices paid increased to 64.3 from 61.7.

Q3 Quarterly Services Survey information revenue was up 1.9% for the quarter and 6.3% year-over-year.

For the larger components, there was a 7.6% year-over-year surge in the finance and insurance component, and a 4.7% rise for the healthcare and social assistance component.

The components used to calculate GDP boosted assumed Q3 GDP growth revision back to 3.5% (was 3.4%) from the 3.5% figure, thanks to an expected $2 billion boost service consumption.

For previously assumed Q3 component revisions, analysts expect trimmings of $3 billion for private construction and $2 billion for exports, but an upward bump of $1 billion for inventories.

Atlanta Fed’s Q4 GDPNow estimate was trimmed to 2.7%, down from 2.8% previously.

Market Sentiment – Dallas Fed Robert Kaplan emphasized patience after noting the narrowing in the 2-year/10-year spread reflects the Fed’s tightening regime acting on the front end, while expectations of slower growth are acting on the long end.

He also stressed the markets are reflecting uncertainty, and he’s counseling patience.

Kaplan said he is going to shorten up on his prognostications and uncertainty is a factor in his thinking.

He’s at the lower end of the 2.5%-3.5% range for neutral.

He believes the Fed should be very gradual and patient, noting inflation isn’t running away, and said the economy is going to look very different in 2019 as fiscal stimulus wanes.

Atlanta Fed Raphael Bostic said policy should be taking a more neutral position as analysts are within shouting distance of neutral, and neutral is where they want to be.

However, he added, as have others, that he won’t prejudge the upcoming policy decision.

Bostic is neither seeing clear signs of overheating, or a material weakening in in the macro data.

He said if he gets clearer signals, he will go in either direction to mitigate the risks.

In closing, he said Inflation is at or very close to the Fed’s target, but he also indicated its performance over the past few months has been weaker.

The iShares 20+ Year Treasury Bond ETF (TLT) extended it win streak to 5-straight session after tapping a high of $119.20.

Fresh and lower resistance at $119-$119.50 was tripped but held with a move above the latter being a continuing bullish signal.

Support remains at $117.50-$117 and the 200-day moving average.

Market Analysis – The Spider S&P 500 ETF (SPY) was down for the 2nd-straight session following the opening pullback to $262.44.

Late November support at $262.50-$262 held with a move below the latter getting $260 and late October lows back in play.

The rebound towards $269.97 into the close failed near-term resistance at $270-$271.50.

Continued closes above the $272.50 level would be a more bullish signal although the 50-day moving average remains on track to fall below the 200-day moving average.

This would form a death cross and is typically a bearish signal for lower lows down the road.

RSI is in a downtrend with support at 45-40. A move below the latter would signal additional weakness towards 35 and mid-November lows. Resistance is at 50.

The Health Care Select Sector Spider (XLV) was lower for the 3rd-straight session after testing a low of $90.14.

Prior support at $90.50-$90 and the 50-day moving average was breached but levels that held into the closing bell.

Near-term resistance is at $93-$93.50 following the rebound to $92.93 into the closing bell.

Continued closes above $94 would be a bullish development for another run towards $96 and fresh all-time highs.

RSI is in a downtrend with support at 50. A move below this level would signaling additional weakness towards 45-40 and November lows. Resistance is at 55-60.

All the best,
Roger Scott
Head Trader
Market Geeks.