August 3, 2020

Dow Jones: US-China Tensions Escalate

Dow Jones: US-China Tensions Escalate

The S&P 500 and Dow Jones industrial average futures are starting the month of August on the back foot as investors are concerned about the U.S.-China tensions and the continuous surge in coronavirus cases around the world. However, traders are somewhat optimistic about economic recovery in China. The Chinese July manufacturing activity printed a better number than originally forecasted; actual 52.8 and forecast 51.3. 

The reason that Dow futures are trading a little soft is that the U.S. Secretary of State, Mike Pompeo, said that the U.S. is likely to announce stricter measures against Chinese companies. This is because they are a threat to national security. These actions are expected to increase the already existing tensions between Washington and Beijing, but President Trump doesn’t seem concerned about the matter.

Last week, Donald Trump said he would take measures to ban TikTok, a Chinese-owned video app, from the U.S. Microsoft is interested in buying the American operation of TikTok. Microsoft confirmed that it held talks to buy the U.S. operations of TikTok from the parent company ByteDance. 

Coronavirus cases are increasing in the U.S. again. More lockdown is likely to occur to stop the spread, and this will adversely impact economic recovery. The U.S. economic data is showing that the U.S economy is stalling, at best. The U.S. policymakers have not delivered a second stimulus round yet, and the U.S. economy, without stimulus support, is likely to roll over. 

The Dow futures are likely to remain sensitive to this fact, and even if we get another second stimulus support, the path to recovery is still full of obstacles. It is a long way to home—the current economic activity levels are far from pre-Covid-19 economic numbers. We need continuous monetary and fiscal support, and policymakers must understand that now is not the time for them to play politics. 

Investors are also likely to pay close attention to the upcoming economic data in the U.S., and the Dow Jones futures may experience higher volatility. The U.S. ISM manufacturing PMI number is the first set of important economic readings we will receive this week. Remember, this week, we are set to see the U.S. NFP data—the U.S. unemployment number and the ISM manufacturing number, which will provide us with some clues about the upcoming jobs number. The forecast for the US ISM manufacturing is 53.6, and anything that matches the forecast or above this level is likely to support risk-on sentiment among stock traders. 

The global stock market had a bit of a mixed day. Stocks advanced in Japan; the Nikkei index surged 2.15% while the HSI and the Aussie ASX declined by 0.95% and 0.10%. 

Market Breadth: Dow Jones Index and S&P 500 Index

The U.S. stock market’s breadth shows that stock investors are less enthusiastic about buying stocks. 43% of the Dow Jones stocks have traded above their 200-day moving average during the last trading day. 

The S&P 500 stocks confirm bull strength. 52% of the shares are trading above their 200-day moving average. 

Dow Jones and S&P 500 Futures Today

The Dow Jones futures are down by minor losses and are trading lower by 50 points. 

The Dow Jones industrial average futures briefly violated the 50 and 100-day SMA on a daily time frame. The 100-day SMA has been able to push the stocks higher, but it is not clear if there is ample confidence among stock traders. In order for this confidence to strengthen, we need the Dow price to stay above the 50-day SMA. 

The DJIA index’s futures are trading above all the three important moving averages: 50, 100, and 200 SMA. If the Dow stocks break below the 50-week SMA, the Dow Jones may face more weakness. 

The S&P 500 index closed the month in positive territory. The index also finished the last week towards the highs of the week. This is positive for the coronavirus stock market rally. The S&P 500 index price is holding on to its gains. For bulls, this is positive. The S&P 500 index’s price needs to stay above the 50, 100, and 200-day SMA. 

CHART 1

Stock Market Rally 

The stock rally that began in April has continued its run for the fourth consecutive month. Nasdaq index has outpaced the Dow Jones and S&P 500 index so far. The Dow Jones Index has been the weakest link. 

CHART 2

The S&P500 stocks need additional assurance, and this can come in the form of second stimulus bill approval. The S&P 500 index closed on a positive note last week; the index soared 0.77%. Tech sectors are still leading the stocks, 6 out of 11 sectors of the S&P 500 fell, and rest recorded gains. Apple filed the biggest gains for the index. 

The Dow Jones index advanced by 114 points yesterday and closed higher by 0.44%. Ten stocks soared, and twenty shares of the Dow Jones declined. Boeing was the biggest drag for the Dow index. 

The NASDAQ composite, a tech-savvy index, gained 190 points on Friday.