Stocks Retreat on Expectations of More Fed Rate Hikes

Morning Markets

September S&P 500 futures (ESU22) this morning are down -1.19% at a 1-1/2 week low. Stock indexes are under pressure today on negative carry-over from last Friday when several Fed officials signaled the Fed would maintain its aggressive rate-hake path.  Long liquidation pressures are also weighing on stocks ahead of the Fed’s annual symposium later this week at Jackson Hole, Wyoming, where Fed Chair Powell may warn that interest rates are going even higher to combat inflation.  The 10-year T-note yield rose to a new 4-week high today at 3.00%.

A positive factor for stocks today was a recovery in Chinese stocks as the Shanghai Composite rebounded from a 1-week low and closed higher after Chinese banks cut their benchmark lending rates and the government took steps to address the ailing property market.

Today’s U.S. economic data was supportive for stocks after the July Chicago Fed national activity index unexpectedly rose +0.52 to 0.27, stronger than expectations of a decline to -0.25.

China cut its 5-year loan prime rate by 15 bp to 4.30%, a bigger cut than expectations of 4.35%.  The 1-year loan prime rate was cut by 5 bp to 3.65%, a smaller cut than expectations of 3.60%.

Bloomberg reported that The People's Bank of China (PBOC) and China's Ministry of Finance would offer 200 billion yuan ($29.3 billion) in special loans to ensure that stalled housing projects are completed. 

The Euro Stoxx 50 today dropped to a 3-week low and is down -1.67%.  Losses in automakers and technology stocks are leading losers in European stocks today.  Concern that the ECB and Fed will keep raising interest rates to slow inflation weighs on stocks on fears the rate hikes will drive the economy into recession. European government bond yields are climbing and pressuring equity prices, with the 10-year UK Gilt yield posting a 1-3/4 month high today at 2.496% and the 10-year German bund yield rising to a 4-week high of 1.274%.

European stocks are also weighed down on concern an energy crisis could drive the Eurozone economy into recession.  European nat-gas prices are up sharply today by +19% at a 5-1/2 month high.  Nat-gas prices surged today after Russia said it would stop gas flows through the Nord Stream pipeline for three days of maintenance on August 31, ramping up fears of a prolonged supply halt.  German Bundesbank Chief Nagel warned today that Germany would face a recession if the energy situation escalates.  Nagel also said the ECB should continue raising interest rates to combat inflation and that Germany’s inflation rate this autumn could hit 10%. 

Asian markets today settled mixed.  China’s Shanghai Composite index today closed up +0.61%, and Japan’s Nikkei index closed down -0.47%. 

China’s Shanghai Composite recovered from a 1-week low and posted modest gains after Chinese banks lowered their benchmark lending rates and Chinese authorities stepped up support for the beleaguered property market. China’s five-year loan prime rate, a reference for mortgages, was cut by 15 bp to 4.30%,  a bigger cut than expectations of -10 bp.  Also, property stocks rallied today after Bloomberg reported that The People's Bank of China (PBOC) and China's Ministry of Finance would offer 200 billion yuan ($29.3 billion) in special loans to ensure that stalled housing projects are completed.  China’s yuan dropped to a 23-month low today against the dollar at 6.8454 yuan/USD.

Japanese stocks fell today on negative carry-over from Friday when hawkish Fed comments signaled the Fed would continue its aggressive rate-hike cycle.  The hawkish Fed comments also helped push global bond yields higher as the 10-year Japan JGB bond yield climbed to a 1-month high today at 0.223%.  Losses in Japanese stocks were limited after Chinese banks lowered lending rates and authorities stepped up support for China’s ailing property market.

Pre-Market U.S. Stock Movers

Netflix (NFLX) fell more than -2% in pre-market trading after CFRA cut its recommendation on the stock to sell from hold, saying the stock may underperform the S&P 500 Index for the rest of the year. 

Semiconductor companies that focus on memory-related chips are falling in pre-market trading after Citigroup warned the companies could see a risk of weaker pricing trends in the second half of this year.  Micron Technology (MU) and Western Digital (WDC) are down more than -1%.

Electric-vehicle makers are weaker in pre-market trading after data showed China electric-vehicle registrations declined in July.  Tesla (TSLA), Rivian Automotive (RIVN), and Nikola (NKLA) are down more than -2%.

United Parcel Service (UPS) is down 2% in pre-market trading after Evercore ISI downgraded the stock to in-line from outperform.

Meme stocks are tumbling in pre-market trading as the latest stock frenzy loses steam.  AMC Entertainment (AMC) sank more than -30% in pre-market trading.  Also, GameStop (GME) is down more than -9%, and Bed Bath & Beyond (BBBY) is down more than -8%.   after narrowing its net income forecast for the full year to $7.0 billion-$7.2 billion from a prior forecast of $7 billion-$7.4 billion. 

Signify Health (SGFY) surged +35% in pre-market trading on reports that Amazon.com (AMZN), UnitedHealth (UNH), CVS Health (CVS), and Option Care Health (OPCH) were all vying to buy the company.

Energy stocks and energy service providers are climbing in pre-market trading after a weekend Barron’s article said the sector is poised to resume a rally given the companies’ strong earnings and hefty payouts to shareholders.  Marathon Petroleum (MPC), ConocoPhillips (COP), Haliburton (HAL), Diamondback Energy (FANG), and Exxon Mobile (XOM) are all up more than +1%. 

Today’s U.S. Earnings Reports (8/22/2022)

Nordson Corp (NDSN), Palo Alto Networks Inc (PANW), Zoom Video Communications Inc (ZM).

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