The VIX edges upward, equity index futures head downward as investors await House Speaker Pelosi’s landing in Taiwan.
Pelosi’s Scheduled Visit to Taiwan Absorbs Investors’ Attention Before the Open
U.S. Manufacturing Picture Is Looking Brighter Than Europe’s Right Now
Are Apple and Other Cash-Rich Companies Telling Us Rates Are Still Low?
Shawn Cruz, Head Trading Strategist, TD Ameritrade
(Tuesday Market Open) Global jitters over U.S. House Speaker Nancy Pelosi’s expected visit to Taiwan dominated premarket trading with major U.S. equities indexes moving mildly lower before the open. JOLTs job openings for June are due this morning while Marriott and Simon Properties offered positive news on the earnings and consumer front.
Global tensions over the controversial visit by the U.S. House leader sent Chinese stocks mostly lower this morning with the Shanghai Composite Index finishing down 2.3%. Also, Hong Kong’s Hang Seng index lost 2.36% for the day and Taiwan’s Taiex, dropped 1.56%.
House Speaker Nancy Pelosi’s scheduled visit today to Taiwan is the first by a House speaker since 1997 and has been criticized for raising tensions between the U.S. and China as China considers Taiwan one of its territories. Taiwan is also an important global tech manufacturer.
CNBC reported before the open that JPMorgan issued a note on Tuesday that said stock markets could “shrug off” Pelosi’s visit if there is “no immediate reaction” from China.
However, the CBOE Market Volatility Index (VIX) gained 6.5% before the opening bell to 24, an indication that the markets may be expecting some turbulence whatever happens.
Before the opening bell, Dow Jones futures were down 0.55%, S&P 500® index futures lost 0.70% and Nasdaq futures were off 0.99%
European markets were also lower in anticipation of events in China. Germany’s DAX and the Stoxx Europe 600 were down by nearly 1% at midday. JOLTs job openings are expected after the open as investors look for signs that the jobs market—and galloping wages—could be cooling, which could provide better news on the inflation front.
Also, Fed watchers will be monitoring public comments from St. Louis Fed President James Bullard later today to see if the Fed may actually be slowing down its current rate hike pace later this year.
While the world waits for global news, earnings reports keep moving right on schedule. In early morning releases:
Second-quarter earnings due after Tuesday’s close include Starbucks (SBUX) down 0.68%, Advanced Micro Devices (AMD) down 0.88% and PayPal (PYPL) up 2.35% as of premarket.
After Monday’s close, Pinterest (PINS) missed on earnings and revenue and offered lower-than- expected forward earnings guidance. But the stock rallied more than 15% in after-hours trading and was up as much as 18% premarket today as investors focused on the company’s engagement matrix.
Pinterest is the latest of the internet companies to rise despite bad earnings reports as investors appear to be happy with the “not as bad as our worst fear” approach to investing.
Stocks bounced from positive to negative in what was basically a flat day of trading. The S&P 500® index (SPX) closed 0.28% lower on the day. Investors are increasingly more confident that the Federal Reserve will ease up on rate hikes. The July ISM Manufacturing PMI report helped to feed this line of thinking because it came in higher than expected at 52.8 instead of 52. While the print was still lower than the 53 reported in June, it was above 50, which suggests that U.S. manufacturing is still expanding.
U.S. manufacturing is looking better than Europe’s because Germany, Spain, Italy, and France all reported manufacturing PMI numbers below 50 on Monday. June’s preliminary manufacturing PMI data for Australia, France, Germany, and Japan also had contraction readings. This business environment could make it difficult for the European Central Bank to continue raising rates to combat inflation.
The U.S. Dollar Index ($DXY) also fell on the news sliding 0.46%. It was pulled lower by the 10-year Treasury (TNX) which fell four basis points to close at 2.6%.
The WTI crude oil futures also settled lower, falling 4.7% to $93.93 per barrel. Crude prices are trading right at their previous lows and threatening to break support.
Investors seem to think that inflation has or is about to wane as they favored consumer-related stocks once again. The Consumer Staples Select Sector Index and the Consumer Discretionary Select Sector Index were the top performers from this particular group of sector indexes. They rose 1.22% and 0.53% respectively.
CHART OF THE DAY: RETRACING STEPS. The U.S. Dollar Index ($DXY—candlesticks) has retraced its uptrend and is testing its previous highs in June and May. If the dollar was to break below these levels, it could mean that it will consolidate in the near future. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
SWITCHING GEARS: The New York Times reported that Pierre Wunsch, a
member of the ECB’s Governing Council, said that despite the risk of recession,
the ECB should continue to hike rates bringing its deposit rate up to 1.5%. The
ECB raised this key rate last month for the first time in 11 years to 0.25%. Of
course, Wunsch is just one member of the six-member council, but on July 23,
ECB president Christine Lagarde wrote in a blog post that the ECB would raise
rates until inflation comes down to the goal of 2%.
If the ECB is just getting started
on their rate hikes as the Fed is starting to slow down, then the U.S. dollar
index should consolidate if not pull back because the euro is more than 50% of
the weighting of the dollar index. The remainder is divided up between five
DOUBLE MEANING: The
market is facing a tough predicament in that nearly every argument for the Fed
to stop raising rates can also be used as an argument that the U.S. is heading
into recession. If rates end up higher in the U.S. and Europe, this could make
the business climate even more difficult. The situation could be one reason why
the Cboe Market Volatility Index (VIX) rose more than 7% on Monday to
land near the 23 level.
Of course, it’s rare for a the VIX to not create lower lows
and lower highs in a downtrend, so the jump could simply reflect market
gyrations. The VIX has had a key level of 20 for many years that many investors
have viewed as being generally bullish. If the VIX falls below this level, it
could signal an extended market rally.
APPLE’S ANGLE: While some think the Fed appears to be
near the end of its rate hikes, Apple (AAPL) plans to issue $5.5 billion
in bonds—which may suggest that rates aren’t high enough yet. In its filing
with the Security and Exchange Commission (SEC), Apple said it plans to use the
funds for general corporate purposes, buying back shares, and paying dividends.
The fact that Apple still finds it a better deal to finance
the purchase of its shares instead of using its massive cash position from
retained earnings to buy back shares sends the message that they think rates
are still quite low.
Until real yields reach zero then it’s likely that many
large companies will still view financing as a better option than using its
retained earnings. A real yield is an inflation-adjusted yield. A real yield of
zero would occur when the 10-year Treasury yield (TNX) is equal to the rate
of inflation. This means that despite higher rates, large companies are
unlikely to stop financing their expansion plans.
Sadly, the situation could leave the burden of the slowing
economy on smaller or newer companies that are less likely to have large cash
positions to draw from and/or can’t afford to borrow at the higher rates to
reach their goals.
Aug 4: Initial jobless claims and earnings from Eli
Lilly (LLY), Amgen (AMGN), ConocoPhillips (COP), Cigna (CI), and Toyota (TM)
Aug 5: Employment Situation Report and earnings from EOG
Resources (EOG), DraftKings (DKNG), and Norwegian Cruise Line (NCLH)
Aug 8: Earnings from Dominion Energy (D), AIG (AIG),
BioNTech (BNTX), Tyson Foods (TSN), and Principal Financial (PFG)
Aug 9: Earnings from Emerson (EMR), Sysco (SYY),
Roblox (RBLX), Coinbase (COIN), and Hyatt (H)
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