Asia morning update - sentiment sours

Disappointing earnings reports coupled with the pinning of accusations on Huawei by the US dampened the atmosphere going into the Asia session today.

This makes it one to watch for the Chinese response ahead of the US-China trade talks.

China-centred concerns

Caterpillar and NVIDIA took centre stage last night, driving home the point of US-China trade war implications from more than just a macro perspective. Serving as a bellwether for economic conditions, equipment manufacturer Caterpillar lagged expectations both on earnings and guidance, though revenue came in roughly to match the consensus. Alongside chipmaker Nvidia, the citing of weaker Chinese demand once again triggered the downturn for markets. This saw to the defensive play coming into place as the broad-based S&P 500 index had all but the real estate and consumer staples sectors in red on Monday.

Amid the US-China tariffs war, one common theme is the Chinese demand story which at approximately 5 to 10 percent of Caterpillar’s total sales and revenue, according to Chairman and CEO Jim Umpleby, could mean the make or break for the last stretch towards targets. As noted, the higher raw materials and shipping costs due to the tariffs had eaten into the baseline of the company which would likely be the rhetoric we continue to find as we meander through the remaining of the Q4 earnings season. The key would remain with guidance as companies adopt ways including cost-cutting measures to shore up confidence, as seen earlier with Western Digital Corp.

Notably for the tech sector, despite Nvidia’s bane to the sector via the slashing of its revenue guidance for Q4 2018, we have yet to see the uptrend for the S&P 500 index’s IT sector reversing. Likewise with the XLK ETF (chart below) that would be in question this week as we await earnings from the likes of Apple Inc., Advanced Micro Devices Inc. and Microsoft Corp., in addition to the conclusions out of the US-China trade talk. Eye the trek towards the resistance at $68.78 with immediate support at $63.36 for the XLK ETF. As prices sit at the uptrend support, Apple’s earnings could perhaps hold the key here as we outline some of the items to watch with the release.

Separately, the taking of legal action against Huawei by the US raises the stake ahead of the US-China meeting. Despite the insistence from the US, it is difficult to clearly separate the two issues. While the market has reacted negatively towards this, this could remain posturing awaiting the Chinese response for confirmation. Early reports, however, have continued in the path of positivity noting the possibility of President Donald Trump meeting with Chinese vice premier in Washington this week, potentially lending weight to the meeting.

Asia open

A shallow slide is expected across the region with the onset of earnings and US-China concerns to weigh in. Early release from Australia added to the gloom as the business survey disappointed, sending the AUD/USD lower. That said, the key focus is up ahead to the Apple Inc. earnings report, one for the tech sector that would also carry weight for the supply chain across Asia. On another note, we are sure to know that the US Q4 GDP release this week will be delayed alongside other BEA data that perhaps reduced the crosswinds to be expected.

Yesterday: S&P 500 -0.78%; DJIA -0.84%; DAX -0.63%; FTSE -0.91%

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