Last chance to BTFD

Summary

How investors handle Friday’s early stock market slump could be instructive.

Oil is the least worry

Friday's European and Wall Street sessions could be very instructive about the rest of the month because they offer investors the best conditions for weeks to 'buy the dip.' Stocks begin on the back foot, hours after the main Asia-Pacific indices closed definitively in the red. There’s early direction from oil prices amid continued scepticism that Friday’s OPEC+ output agreement goes far or fast enough to release downward pressure from booming U.S. production. Oil shares join the broad sweep lower though Europe’s Oil & Gas index isn’t the worst hit so far.

Car shares lead

Car shares once again lead from the back with a 2% drop, twice the amount most sector gauges were lower in the first hour of trade. A sell-off of the mining and metal industry also points to the same trigger. China’s November retail sales were below expectations and the weakest in about 15 years. Typically, Western stock markets aren’t in the habit of such strong reactions to the health of China’s High Street, but this year’s been far from typical. The hit to sentiment is compounded by further signs that the second largest economy is entering a protracted period of slow growth.  Last month’s industrial output of 5.4% on the year also missed (including a 10% collapse in auto sales) taking the growth rate back to early-2016 levels.

Chinese shoppers pause

With global economic expectations softened by deteriorating trade relations and correcting stock markets, European investor focus is, for now, looking past a clutch of more promising clues. Chiefly, Chinese business investment activity was on the rise in November setting the stage for China’s near-record import rates from Europe to stay underpinned by capital goods orders. Admittedly, U.S. imports are at a three-year low. In any case, the read of where we are in the European and U.S. growth cycle is far less definitive than in China and elsewhere. Furthermore, after Thursday’s trimmed ECB forecasts and commentary, European monetary policy is now officially in step with the Fed’s Quantitative Tightening Lite. As markets swing into a stretch of weeks that’s typically positive for stocks, still fair growth in developed markets, a promising staging post in the trade dispute and early signs of stabilisation in China’s economy, Friday’s weak start could well tempt buyers later. If not, investors the latest big step lower will seal the case for significant declines in the price of risky assets to continue into early 2019.

DXY in focus

The dollar, inching back up to peaks from which it has reversed repeatedly over the last month is on watch. Downdrafts on the yuan in reaction to this morning’s economic releases fan out to the other commodity related currencies and those of China’s key trading partners alike. The euro, barely up from signs of tardy ECB tightening was pushed further off balance by disappointing PMI prints. Sterling continues to languish. The poorly defined wait for another chance to vote on the Brexit deal exposes the pound to idle and still elevated volatility. Should these inverse dollar advantages propel DXY to the top of its recent range around 97.7, Treasury yields, a pillar of anxiety this year, will also revive more. The 10-year rate was toying with the round(ish) 2.9% at last look on 2.8715%.

Source: Refinitiv/City Index

Watch U.S. retail, output

Headline U.S. Industrial Production and Retail Sales readings this afternoon, are unlikely to be a sufficient trigger in themselves, but watch the details. Solid headline outcomes plus signals that manufacturers are getting savvy by outsourcing will add weight to more positive interpretations for the U.S. economy. Sentiment on both the U.S. dollar and stocks could well be encouraged should the White House formalise, as expected, the mooted pause in higher tariff rates on China.