US stocks attempt to break higher but Trump trade threat remains

Summary:

• US500 near 2-month after dovish Fed

• Shares in Facebook surge after earnings beat

• Initial jobless claims spikes; Trump tweets on Chinese trade talks

The markets were clearly positioning themselves for a dovish Fed meeting last night, with stocks rallying higher ahead of the announcement, and Powell & Co didn’t disappoint with the Fed chair stating the bank were “patient” on rates while also considering reducing the pace of the quantitative tightening programme, QT. Equities surged on the news and built on their earlier gains with the US500 breaking above 2676 and in doing so breaching the upper bound of the markets recent range. There are several reasons remaining that suggest this rally won’t last - which we’ll come on to in a moment - but whilst the markets remains above 2676 on a daily closing basis, the outlook continues to favour the bulls in the near term.

The US500 broke and closed above 2676 yesterday and unless the markets moves back below this level then a break higher is in play and the outlook seems to favour longs in the near term. Source: xStation    

Not long after the Fed the market received further good news as investors jumped into Facebook shares in after-hours trade and sent the social media company’s firmly higher after its latest trading update. If we remember back to last July it was a terrible market reaction to a Facebook earnings release that showed the first signs of real weakness in FAANG stocks that had carried the benchmarks higher up to that point, and as such the latest reaction is all the more pleasing. Facebook generated revenue of $16.91B with EPS of $2.38 compared to the street’s forecast of $16.39B and $2.18 respectively. Another clear positive from the report was the 2.2% rise in monthly users to 2.32 billion.

Facebook is called to open higher by over 10% this afternoon around the 166 mark which will see the market approach the 50% fib of the decline seen from the all-time high just before the July ‘18 earnings update.  Source: xStation

So with that good new known, now let’s turn our attention to the bad. Firstly, the most recent weekly jobless claims from the US has shown a pretty sharp spike higher to 253k vs an expected 215k. This is the highest level since the end of September 2017 although there are a couple of mitigating circumstances which could explain it somewhat. The main impact could have come from the government shutdown which may have seen public workers claiming the benefits while the Martin Luther King holiday could also have had an adverse impact. The 4-week moving average smooths this out somewhat, but still saw a rise of 5k to 220k.

Initial jobless claims spiked higher last week but there could be mitigating circumstances to explain the rise. The 4-week moving average remains relatively low. Source: XTB Macrobond

If the employment data could be described as a mild negative, and maybe seen as setting the scene ahead of tomorrow’s NFP, a far bigger issue remains the US-China trade tensions. A series of tweets from US president Donald Trump in the past hour have shed some more light on the issue and are shown below:

Source: Twitter