Markets Today: Stocks Retreat Amid China Woes and Soaring Bond Yields

Rich Asplund - Barchart - Fri Aug 18, 2023

Morning Markets

September E-Mini S&P 500 futures (ESU23) this morning are down -0.66%, and Sep Nasdaq 100 E-Mini futures (NQU23) are down -0.94%, both at 2-month lows.

This morning, Stock indexes are under pressure as worries about China’s economy and higher global interest rates dampen market sentiment. Stock index futures extended their losses after Bank of America warned that U.S. equities could drop another 4% as the economic turmoil in China spooks global investors and bond yields surge. A decline in global bond yields today is a supportive factor for stocks.

Stock trading may be volatile today due to the options expiration of August contracts. According to an estimate from analytical firm Asym 500, some $2.2 trillion of longer-dated contracts are tied to stocks and stock indexes scheduled to mature today.

The markets are discounting the odds at 10% for a +25 bp rate hike at the September 20 FOMC meeting and 36% for that +25 bp rate hike at the November 1 FOMC meeting.

Global bond yields are lower. The 10-year T-note yield is down -1.2 bp to 4.263%. The 10-year German bund yield is down -8.2 bp at 2.627%. The 10-year UK gilt yield is down -4.5 bp at 4.701%.

Overseas stock markets are lower. The Euro Stoxx 50 is down -0.92%. China’s Shanghai Composite Index today closed down -1.00%. Japan’s Nikkei Stock Index closed down -0.5%.

The Euro Stoxx 50 tumbled to a 4-1/2 month low and is moderately lower. Concerns over higher interest rates and a slowing Chinese economy are weighing on European stocks. Weakness in European retail stocks is leading the overall market lower after UK retail sales fell more than expected in July. Losses in European equities accelerated after Morgan Stanley said they remain cautious on European stocks and expect them to decline by up to 10% through the summer, which “should ensure” further earnings downgrades in the second half. On the positive side, European chip-tool makers rose after Applied Materials, the largest U.S. maker of chipmaking machinery, gave a bullish forecast for the current quarter, signaling that an industry slump may be fading.

Eurozone Jun construction output fell -1.0% m/m, the biggest decline in 3 months.

China’s Shanghai Composite closed moderately lower. Concerns that China’s property crisis may be deepening is weighing on Chinese stocks and investor confidence. Many state-owned property developers are warning of widespread losses. According to Bloomberg data on corporate filings, eighteen out of 38 state-owned enterprise builders listed in Hong Kong and mainland China reported preliminary losses in the six months ended June 30, up from 11 that warned of full-year losses in 2022. The losses could hamper efforts to take on unfinished projects left by defaulted private-sector companies, further curbing homebuyer sentiment. In an attempt to improve market sentiment, China’s securities regulator said it would cut handling fees in stock transactions.

Foreign investors are fleeing Chinese stocks amid worsening sentiment toward China’s economy. Over the last nine trading sessions, foreign investors have sold 46.2 billion yuan ($6.3 billion) of mainland Chinese stocks.

China Jul foreign direct investment year-to-date fell -4.0% y/y, the biggest decline in 3-1/4 years.

Japan’s Nikkei Stock Index today fell to a 2-1/2 month low and closed moderately lower. Worries about higher U.S. interest rates and Chinese economic woes are weighing on Japanese stocks. Losses in machinery stocks, metals producers, and electrical appliance makers led the Nikkei Stock Index lower after Morgan Stanley downgraded the sectors, saying they are the most exposed to China’s economic growth slowdown. However, gains in food and beverage makers and IT service providers lifted the overall market from its worst levels after Morgan Stanley upgraded those sectors, citing Japan’s solid domestic growth.

Japan Jul national CPI ex-fresh food and energy rose+4.3% y/y and matched May as the largest increase in 42 years.

Pre-Market U.S. Stock Movers

Keysight Technologies (KEYS) sank more than -10% in pre-market trading after forecasting Q4 revenue of $1.29 billion-$1.31 billion, weaker than the consensus of $1.39 billion.

Crypto-linked stocks are falling in pre-market trading, with the price of Bitcoin down more than -4% to a 2-month low. As a result, Coinbase Global (COIN), Bit Digital (BTBT), Marathon Digital (MARA), Riot Platforms (RIOT), and MicroStrategy (MSTR) are down -3% or more.

Bill Holdings (BILL) tumbled more than -6% in pre-market trading after forecasting 2024 revenue of $1.29 billion-$1.31 billion, the midpoint below the consensus of $1.31 billion.

Estee Lauder (EL) dropped more than -4% in pre-market trading after reporting Q4 adjusted gross margin of 67.8%, below the consensus of 68.5%.

Applied Materials (AMAT) rose more than +2% in pre-market trading after reporting Q3 net sales of $6.43 billion, above the consensus of $6.16 billion, and forecasting Q4 net sales of about $6.51 billion, well above the consensus of $5.88 billion.

Ross Stores (ROST) climbed more than +4% in pre-market trading after reporting Q2 EPS of $1.32, bette4 than the consensus of $1.16, and forecasting Q3 EPS of $1.16-$1.21, stronger than the consensus of $1.15.

Dolby Laboratories (DLB) rallied more than +6% in pre-market trading after S&P Dow Jines Indices said the company would replace Staar Surgical in the S&P MidCap 400 before the opening of trading on Aug 22.

Bloomin’ Brands (BLMN) climbed more than +6% in pre-market trading after the Wall Street Journal reported that Starboard Value has built a stake of more than 5% in the company, making it one of Bloomin’ Brands top-five shareholders.

Marvell Technology (MRVL) gained more than +1% in pre-market trading after B Riley Securities upgraded the stock to buy from neutral with a price target of $75.

Today’s U.S. Earnings Reports (8/18/2023)

Deere & Co (DE), Estee Lauder Cos Inc/The (EL), Palo Alto Networks Inc (PANW).

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.