Broader Market Closes Lower as Chip Stocks Plunge

The S&P 500 Index ($SPX) (SPY) Wednesday closed down -1.39%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.59%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -2.94%.

Stock indexes Wednesday settled mixed, with the Dow Jones Industrials posting a new record high and the Nasdaq 100 falling to a 2-week low.  A slump in chip stocks and megacap technology companies weighed on the broader market. Chip stocks retreated because of concerns that the US may adopt harsher restrictions on Chinese trade and semiconductor technology.  Bloomberg reported Wednesday that the Biden administration has told allies it is considering using the most severe trade restrictions against chip makers if they continue giving China access to advanced semiconductor technology.  Stocks maintained their losses after US Jun housing starts and Jun manufacturing production rose more than expected, hawkish factors for Fed policy.

US Jun housing starts rose +3.0% m/m to 1.353 million, stronger than expectations of 1.300 million.  Jun building permits, a proxy for future construction, rose +3.4% m/m to 1.446 million, stronger than expectations of 1.400 million.

US Jun manufacturing production rose +0.4% m/m, stronger than expectations of +0.1% m/m.

US MBA mortgage applications rose +3.9% in the week ended July 12, with the purchase mortgage sub-index falling -2.7% and the refinancing sub-index climbing +15.2%.  The average 30-year fixed rate mortgage fell -13 bp to 6.87% from 7.00% in the prior week.

Richmond Fed President Barkin said the breadth of recent disinflation has been encouraging, though he's "still looking for more" evidence it will be sustained.

Fed Governor Waller said the Fed is getting "closer" to cutting rates, but he'd like to see a "bit more evidence" inflation is on a sustained downward path.

New York Fed President Williams said current Fed policy is appropriate until we see "more data." He added that US inflation readings from the last three months are "getting us closer to a disinflationary trend that we're looking for, and I would like to see more data to gain further confidence inflation is moving sustainably to our 2% goal."

The Fed Beige Book was dovish for Fed policy and supportive of stocks as it stated, "Expectations for the future of the economy were for slower growth over the next six months due to uncertainty around the upcoming election, domestic policy, geopolitical conflict, and inflation.  Also, wages grew at a modest to moderate pace as prices rose modestly overall, and nearly every Fed district "mentioned retailers discounting items or price-sensitive consumers only purchasing essentials., trading down in quality, buying fewer items, or shopping around for the best deals."

The markets are discounting the chances for a -25 bp rate cut at 5% for the next FOMC meeting on July 30-31 and 99% for the following meeting on September 17-18.

Overseas stock markets Wednesday settled lower.  The Euro Stoxx 50 fell to a 2-week low and closed down -1.14%.  China's Shanghai Composite closed down -0.45%.  Japan's Nikkei Stock 225 Index fell to a 1-week low and closed down -0.43%.

Interest Rates

September 10-year T-notes (ZNU24) Wednesday closed up +3.5 ticks.  The 10-year T-note yield fell -1.4 bp to 4.144%.  Sep T-notes Wednesday recovered from early losses and climbed to a 4-month high, and the 10-year T-note yields dropped to a 4-month low of 4.144%.  Strong demand for the Treasury’s $13 billion auction of 20-year T-bonds sparked short covering in T-notes, as the auction had a bid-to-cover ratio of 2.68, above the 10-auction average of 2.62.  Gains in T-notes accelerated Wednesday afternoon after the dovish Fed Beige Book was released. 

T-notes Wednesday initially moved lower after reports on US Jun housing starts and Jun manufacturing production rose more than expected.  Also, several Fe members said they favored waiting for inflation to fall further before cutting interest rates, which weighed on T-note prices. 

European government bond yields Wednesday were mixed.  The 10-year German bund yield fell to a 3-week low of 2.408% and finished down -0.6 bp to 2.421%.  The 10-year UK gilt yield rose +2.7 bp to 4.076%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 3% for the July 18 meeting and 79% for the September 12 meeting.

US Stock Movers

Chip stocks plummeted Wednesday after Bloomberg reported that the Biden administration had told allies that it would consider using the most severe trade restrictions available if companies continued giving China access to advanced chip technology.  As a result, ASML Holding NV (ASML) closed down more than -12% to lead losers in the Nasdaq 100.  Also, Advanced Micro Devices (AMD), Applied Materials (AMAT), Marvell Technology (MRVL), and Lam Research (LRCX) closed down more than -10%.  In addition, KLA Corp (KLAC) and ARM Holdings Plc (ARM) closed down more than -9%.  Finally, Qualcomm (QCOM) closed down more than -8%, and Nvidia (NVDA), Micron Technology (MU), Western Digital (WDC), and Broadcom (AVGO) closed down more than -6%.

Mega-cap technology stocks retreated and weighed on the overall market.  Meta Platforms (META) closed down more than -5%, and Amazon.com (AMZN) closed down more than -2% to lead losers in the Dow Jones Industrials.  Also, Apple (AAPL) closed down more than -2%, and Microsoft (MSFT) closed down more than -1%.

Elevance Health (ELV) closed down more than -5% after forecasting full-year adjusted EPS of $37.20, below the consensus of $37.28.

Five Below (FIVE) closed down more than -24% after forecasting Q2 comparable sales to fall -6% to -7%, weaker than the consensus of -4.66%. 

First Horizon (FHN) closed down more than -5% after reporting Q2 adjusted revenue of $819 million, weaker than the consensus of $822.1 million. 

Uber Technologies (UBER) closed down more than -7% on signs of insider selling after an SEC filing showed CEO Khosrowshahi sold $36 million of stock on Monday.

American Airlines Group (AAL) closed down more than -1% after TD Cowen downgraded the stock to hold from buy. 

Semiconductor contract manufacturing companies with US manufacturing capabilities rose Wednesday on speculation they could benefit from potential semiconductor-industry restrictions on China and Taiwan.  As a result, GlobalFoundries (GFS) closed up more than +6% to lead gainers in the Nasdaq 100, and Intel (INTC) closed up +0.43%. 

UnitedHealth Group (UNH) closed up more than +4% to lead gainers in the Dow Jones industrials after Jeffries upgraded the stock to buy from hold with a price target of $647. 

GitLab (GTLB) closed up more than +9% after Reuters reported the company was exploring a sale after attracting interest from potential bidders. 

Gates Industrial (GTES) closed up more than +3% after S&P Dow Jones Indices said the stock will be added to the S&P Smallcap 600 Index before trading opens on July 22. 

US Bancorp (USB) closed up more than +4% after reporting Q2 adjusted EPS of 98 cents, above the consensus of 94 cents. 

Johnson & Johnson (JNJ) closed up more than +3% after reporting Q2 adjusted EPS of $2.82, stronger than the consensus of $2.71. 

VF Corp (VFC) closed up more than +13% after it sold its Supreme brand to EssilorLuxottica for $1.5 billion in cash.

Aehr Test Systems (AEHR) closed up more than +22% after reporting Q4 revenue of $16.6 million, better than the consensus of $15.5 million, and forecast 2025 total revenue of at least $70 million, stronger than the consensus of $67.9 million.

Earnings Reports (7/18/2024)

Abbott Laboratories (ABT), Blackstone Inc (BX), Cintas Corp (CTAS), Domino's Pizza Inc (DPZ), DR Horton Inc (DHI), Intuitive Surgical Inc (ISRG), KeyCorp (KEY), M&T Bank Corp (MTB), Marsh & McLennan Cos Inc (MMC), Netflix Inc (NFLX), PPG Industries Inc (PPG), Snap-on Inc (SNA), Textron Inc (TXT).

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