Opening Bell: Global Shares Fall; U.S. Futures Mixed, USD Corrects

Key Events

European equities slipped lower on Thursday morning, with most sectors in the red. Insurance firms in particular have been posting a downbeat performance.

Earlier today, Asian shares also underwhelmed, echoing the decline seen in US indices yesterday after the Federal Reserve left interest rates unchanged on Wednesday but confirmed its tightening schedule as it expects inflation will rise above target.

However, futures on the S&P 500, NASDAQ 100 and the Dow are all pointing to a stronger open later this morning, while the dollar continues to retreat.

Will investors find new optimism by turning their focus back to corporate earnings, or will US-China trade tensions ahead of diplomatic talks beginning tomorrow add to worries of rising rates, and keep pressuring stocks lower?

Earlier today, Australian shares listed on the S&P/ASX 200 bucked the region's downward trend for the second day in a row, as financials stocks continued their rebound from an earlier selloff.

Chinese shares on the Shanghai Composite also gained ground after an earlier decline, while stocks on Hong Kong's Hang Seng underperformed despite the fact that smartphone maker Xiaomi announced it would IPO on the Hong Kong exchange. The Chinese company is seeking to raise $10 billion from investors, in what is set be the world's largest IPO since Alibaba's (NYSE:BABA) first foray into the public markets in September 2014. The actual offering is expected to happen "in the next couple of months," according to CNN.

Japan's bourses remained closed today for the Constitution Day holiday.

Global Financial Affairs

Xiaomi's vaunted IPO notwithstanding, there's and even more sizeable IPO on the way. Saudi Arabia is looking to sell a 5 percent stake in its state-owned energy giant Aramco for a gargantuan $100 billion—which would be four times the current record held by Alibaba and dwarf Xiamco's launch. That offering, on the country's own Tadawul exchange, is expected to happen either later in the year or in early 2019.

What effect will Aramco's IPO have on oil markets, if we consider that the price of oil and the value of Aramco shares are likely in direct proportion? One would assume the higher the price of oil the higher the value of Aramco shares.

Still, the oil policy adopted by the Saudis in the past few years might confuse investors. Between 2014 and 2016, they flooded the market with supply. During that period they focused more on their market share than on the fact that the price of oil was plunging. However, since 2016, the Saudis have consistently committed to production limits, appearing to be willing to do whatever it takes to support prices.

One could therefore easily gather that the focal point of the Saudi strategy over the last four years has been Aramco's IPO value. At first, the Saudi kingdom sought market share, then a return to profitability.

As such, it is most likely that Saudi Arabia will continue down this line, focusing on supporting prices ahead of the landmark IPO. Should US President Donald Trump reimpose sanctions against Iran, another million barrels of oil a day would be wiped out from global supply, perhaps leading to further price increases. But in the short-term, a surprisingly higher-than-expected stockpile report and the US dollar hovering around a four-month high are weighing on the price.

Yesterday, US investors endured another tumultuous ride on the equity market roller coaster, which has been especially disruptive this year so far. The S&P 500 and Dow Jones Industrial Average opened lower, consolidated during the first three hours, then reversed course and advanced in the hours ahead of the Fed policy meeting. However shares ultimately plunged during the last two hours of trade.

While the central bank said that inflation rates are poised to top its 2.00 percent target, what it didn't say resonated more loudly for traders. In fact, notably, the Fed did not signal a shift to a faster pace of monetary policy tightening. It's unclear why that would surprise traders: high inflation—and particularly, an above-target rate—would logically turn the Fed more hawkish, as policymakers rush in to tackle any excessive spike in inflation.

Yesterday's mid-day rebound in US stocks was led once again by tech shares, including Apple (NASDAQ:AAPL). While the computer and smartphone behemoth's share price jumped more than 5 percent at its highest intraday level, spurred by Tuesday's upbeat earnings report, the stock closed below the top of its falling channel, near 4 percent higher.

The fact that it penetrated the top but closed lower supports a presumed resistance. Should the resistance withstand bullish attacks, the price may fall back toward the bottom of the channel and $160 — which would be understandable, should the broader market sell off.

In recent posts we've frequently discussed the consolidation US equities are undergoing since they reached their record highs (on January 23 for the Russell 2000, January 26 for the SPX and the Dow and and March 12 for the NASDAQ Composite). We highlighted the debate among technicians about the shape of the consolidation for the S&P 500, whether it is a neutral symmetrical triangle or a bearish descending triangle. Since late March, stocks have been consolidating in an even tighter range, as the SPX approaches the apex of the triangle at which point it will 'pick a side' from which to erupt.

While the price range has held above the 100 DMA up even after the index stumbled on the first major selloff after hitting a record high, it slid below the 100 DMA following the second major selloff (mid-March to early April), but still found support by the 200 DMA. The support-to-resistance switch in the 100 DMA favors sellers over buyers.

Only the Russell 2000 has managed to stay above the 100 DMA. It has been the only major US index to edge higher in the last two days. The stocks listed on the small-cap index—typically domestic businesses that don't rely on foreign markets for growth—have become more attractive for investors during this period as the US-China trade spat escalates.

The Dow is now 11 percent below its record close, the S&P 500 is 9 percent lower, the NASDAQ is 7.3 percent beneath its record level whereas the Russell 2000 is a mere 3.3 percent below that mark. This comparison suggests that ongoing trade jitters are the single biggest headwind weighing on investors. It's the most obvious factor separating the performance of the small cap benchmark on one side and on its larger-cap peers on the other side. So much so that it has now overshadowed Trump's historic tax overhaul, from which domestic companies would gain little to no benefit.

During the first hour following the Fed statement yesterday, which served as a strong confirmation that the three additional hikes expected for 2018 will in effect take place, the dollar slid 0.4 percent, but then rebounded 0.55 percent within two hours. Since then, the greenback has been falling steadily, and is down 0.36 percent as of the time of writing.

Why? Shouldn't higher rates provide investors a higher payout for holding the dollar, as well as a consistently positive interest rate differential versus other major currencies (with other central banks such as the BoE, the EBC, and the BoJ heading the other way, towards a more dovish stance)? The USD is oversold.

After a 10-day winning streak out of 11 sessions, investors are now taking profits. The dollar's intermittent advance following yesterday's Fed release was probably mostly determined by short-term traders.

Up Ahead

• Canadian Trade Balance figures are released at 8:30 a.m. EST Thursday.
• Euro-zone producer prices are scheduled for Thursday.
• The European Commission will present its spring economic forecasts, including growth, inflation, debt and deficit projections.
• US nonfarm payroll numbers, scheduled for Friday, will probably show an increase for the month of April, while the unemployment rate is forecast to drop to 4 percent.
• Reserve Bank of Australia releases its quarterly update of growth and inflation forecasts on Friday.
• Berkshire Hathaway (NYSE:BRKa) holds its annual shareholders meeting in Omaha, Nebraska on Saturday.

Market Moves

Stocks

• Canada’s S&P/TSX Composite closed up 0.40% Wednesday, hitting a new one-month high.

• The STOXX Europe 600 fell 0.2 percent as of 8:06am London time, headed for the largest fall in more than a week.

• S&P 500 Futures gained 0.1 percent.
• The MSCI All-Country World Index dipped 0.1 percent to the lowest level in more than a week.
• The UK’s FTSE 100 decreased 0.1 percent, the first retreat in more than a week.
• Germany’s DAX fell 0.1 percent, the first retreat in more than a week.
• The MSCI Emerging Market Index dropped 0.7 percent to the lowest level in more than a week.
• The MSCI AC Asia Pacific dipped 0.3 percent to the lowest level in a week.

Currencies

• The Canadian loonie has gained 0.31% this morning, and is trading at 0.7786, against the U.S. dollar. The Dollar Index fell 0.35 percent.

• The euro gained 0.1 percent to $1.1968.
• The British pound climbed 0.1 percent to $1.3587, the first advance in more than a week.
• The Japanese yen increased 0.1 percent to 109.73 per dollar.

Bonds

• Canada’s Canada 10-Year dropped on Thursday to 2.329, a 1.44-percent decrease.
• The yield on 10-year Treasuries gained one basis point to 2.98 percent, the highest in a week.
• Germany’s 10-year yield climbed one basis point to 0.59 percent, the highest in a week.
• Britain’s 10-year yield gained one basis point to 1.457 percent, the highest in a week.

Commodities

• West Texas Intermediate crude fell 0.2 percent to $67.81 a barrel.
• Copper climbed 0.1 percent to $3.07 a pound.
• Gold increased 0.2 percent to $1,306.92 an ounce.