Wall St. set to open sharply lower as risk-off returns

Summary:

• US indices allmore than 1% lower ahead of US session

• US500 probing potentially key support at 2711

• Caterpillar set to open sharply lower despite earnings beat

There’s a sea of red across indices today with stocks around the globe taking a hammering. The largest rally in almost 3 years in Chinese equities on Monday was all but entirely erased overnight and the selling has spread to Europe with the DE30 and EU50 both falling to levels not seen since 2016. There’s a clear risk-off mood to the price action with Gold surging to a 3-month high and the Japanese Yen the best performing currency in the FX space. Unsurprisingly this has also weighed on US markets, with all the major benchmarks off by over 1% ahead of the cash open.

The US500 has now returned to the 3-month low made a couple of weeks back at 2711 and how price reacts here could well prove pivotal going forward. If bulls can defend this line then the range from 2711-2824 remains intact and a double bottom would form but a failure to do so could turn ugly. Source: xStation

The US continues to hold up relatively well compared to its European and Asian peers but there are some clear warning signs afoot. For instance price has broken below the 200 day SMA in recent days and unlike the past few times this has occurred there hasn’t been much of a bounce. Before the past couple of weeks the market had only closed below the 200 day SMA on one occasion in the past 2 years (in early April) but barring a strong recovery today, it will be the 4th close below the SMA in just 9 sessions. A bear flag appears to have been possible broken to the downside and should the lows of 2711 give way the another sizable leg lower of 100 points or more may occur.  

The US500 has closed below the 200 day SMA with a rather alarming regularity in recent weeks and should the low at 2711 not hold then another larger leg lower could ensue. Source: xStation

Earnings season is in full swing and arguably the most noteworthy release ahead of the opening bell comes from Caterpillar. The heavy-duty equipment maker is trading heavily lower by around 7% in the pre-market with investors clearly taking a dim view of the latest update. On the face of it, the results looked good with adjusted earnings per share of $2.86 in the third quarter - compared with $1.95 for the same period last year and analyst forecasts of $2.85. However, the negativity seems to come from the firm’s forward guidance with 2018 earnings now projected to be in the $11-12 range. The lower range of the forecast fell short of the $11.65 EPS estimated by analysts surveyed by Refinitiv.

"Manufacturing costs were higher due to increased material and freight costs. Material costs were higher primarily due to increases in steel prices and tariffs," the company said. "Freight costs were unfavorable primarily due to supply chain inefficiencies as the industry continues to respond to strong global demand." Later in the statement, the company said the impact of tariffs for third-quarter material costs was about $40 million. "For the full year of 2018, we expect the impact of recently imposed tariffs will be at the low end of the previously provided range of $100 million to $200 million," the company said.

Shares in Caterpillar are called to open sharply lower with Google finance calling them to begin around the 120 mark. The stock has dropped sharply in recent weeks and will likely trade at its lowest level in over a year today. Source: xStation