Stocks Close Lower on Taiwan Tensions

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday closed down -0.28%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.14%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.06%. 

U.S. stock indexes were undercut by U.S.-China tensions, weak Chinese PMI data, and hawkish Fed comments.  On the bullish side, stocks saw support from Monday’s decline in the 10-year T-note yield, the stronger-than-expected U.S. ISM manufacturing index, and favorable U.S. inflation news.

U.S.-Chinese tensions regarding Taiwan remain high after China’s Foreign Ministry spokesman Monday said that China’s military “won’t sit idly by” if House Speaker Nancy Pelosi visits Taiwan.  The spokesman said, “Her stature as the No. 3 U.S. official means a trip would be highly sensitive.  As to what measures, let’s wait and see whether she insists on the visit.”  The last time a U.S. House Speaker visited Taiwan was a visit by Newt Gingrich in 1997.

Ms. Pelosi and a delegation of other Democratic House members are currently on a tour of several Asian countries, and Ms. Pelosi’s office has not confirmed whether she will stop in Taiwan.  Multiple news outlets are reporting that Ms. Pelosi will in fact arrive Tuesday or Wednesday to meet with Taiwanese officials.

Chinese military action could include new incursions by Chinese fighter jets into Taiwan’s air defense identification zone or possibly even interference with Ms. Pelosi’s plane. China could also launch some missiles into the sea near Taiwan.  The White House on Monday urged China to take any Pelosi visit in stride and said there has been no U.S. policy change to justify any escalation of the situation by China.

China’s July manufacturing PMI, reported on Saturday, fell -1.2 points to 49.0, which was weaker than expectations for a slight +0.1 point increase to 50.3.  China’s July non-manufacturing PMI fell by -0.9 points to 53.8, which was slightly weaker than expectations for a -0.8 point decline to 53.9.  Meanwhile, the July Caixin China manufacturing PMI fell -1.3 points to 50.4, which was weaker than expectations for a -0.2 point decline to 51.5.  The weak Chinese PMI reports suggested that China’s recent Covid shutdowns had a larger negative effect on the economy than expected.

Monday’s July U.S. ISM manufacturing index fell -0.2 to a 2-year low of 52.8, which was stronger than expectations of a -1.0 point decline to 52.0.  The July prices-paid sub-index fell sharply by -18.5 points to 60.0, much weaker than expectations of a decline to 74.3.  The July new orders sub-index fell by -1.2 points to 48.0, but the July ISM employment sub-index rose by +2.6 points to 49.9.

Stocks were undercut by Minneapolis Fed President Kashkari’s (non-FOMC voter) comment on Sunday that the Fed is committed to doing what is necessary to slow inflation to its 2% target.

Overseas stocks on Monday were mixed.  The Euro Stoxx 50 Monday closed slightly lower by -0.04%, giving back a little of last Friday’s +1.53% rally.  The Nikkei index Monday closed up +0.69%.  China’s Shanghai Composite Index Monday closed up +0.21% despite the weak Chinese PMI reports seen over the weekend.

Today’s stock movers…

Energy stocks and energy service producers fell on Monday due to the sharp -4.8% decline in September WTI crude oil futures.  Oil company stocks were among the largest losers in the S&P 500.  Baker Hughes (BKR) fell -4.01%, Halliburton (HAL) fell -3.79%, Hess fell -3.32%, Marathon Oil (MRO) fell -3.27%, and Exxon (XOM) fell -2.53%. 

Royal Caribbean Cruises (RCL) Monday fell sharply by -7.47% and was the largest loser in the S&P 500 index due to the company’s announcement of a $900 million note offering.  The news helped drag Carnival (CCL) down -1.47%.

Bitcoin (^BTCUSD) fell -3.3% on Monday, falling back from a 1-1/2 month high on Saturday.  Monday’s weakness in bitcoin put downward pressure on crypto stocks.  Coinbase (COIN) fell -0.34%, and Marathon Digital (MARA) fell -5.47%, although Riot Blockchain (RIOT) and Bit Digital (BTBT) closed higher.

Colgate-Palmolive Co (CL) rallied +3.08% after Wells Fargo (CL) upgraded the stock to equal-weight from underweight due to its view of an improved earnings outlook.

Comcast (CMCSA) closed +0.05% even though Barclays cut the stock to equal-weight from overweight and said cable companies are “likely past peak growth.”

Pepsico  (PEP) rallied +1.22% after news that the company will buy an 8.5% stake worth $550 million in fitness energy drink maker Celsius Holdings  (CELH).  Pepsi reached a long-term strategic distribution agreement with Celsius. Celsius on Monday rallied by +11.23% on the news.

Across the markets…

Sep 10-year T-notes (ZNU22) on Monday closed up +7 ticks, and the 10-year T-note yield fell by -6.1 bp to 2.588%.  T-note prices rallied on the decline in the 10-year inflation expectations rate by -4.9 bp to 2.504%, which was sparked by Monday’s sharp -4.8% sell-off in crude oil prices and news that the July U.S. prices-paid sub-index fell sharply by -18.5 points to 60.0.  The T-note market shook off hawkish remarks by Minneapolis Fed President Kashkari over the weekend.

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