S&P Futures Plunge Ahead of FOMC Meeting Minutes, China Growth Concerns Weigh on Sentiment

Oleksandr Pylypenko - Barchart - Wed Jul 5, 2023

September S&P 500 futures (ESU23) are trending down -0.42% this morning as market participants assessed the latest signs of China’s faltering economic recovery while awaiting the release of the Federal Reserve’s June policy meeting minutes.

In Monday’s trading session, Wall Street’s major averages ended moderately higher, with the tech-heavy Nasdaq 100 notching a 2-week high. Tesla Inc (TSLA) surged more than +6% and was among the top percentage gainers on the Nasdaq 100 after announcing record Q2 deliveries. Regional bank stocks also advanced, with Zions Bancorp (ZION) climbing over +4%, KeyCorp (KEY) rising more than +3%, and M&T Bank (MTB) gaining over +2%. In addition, Fidelity National Information Services Inc (FIS) soared about +6% following a report that private equity firms were exploring taking a majority stake in Fidelity’s Worldpay unit.

Economic data on Monday showed that the U.S. ISM manufacturing index unexpectedly fell to 46.0 in June, weaker than expectations of 47.2, contracting for a seventh straight month. Also, the U.S. June S&P global manufacturing PMI came in at 46.3, in line with expectations.

“Data in the U.S. and EU is increasingly pointing to the growing risk of slowing economic activity but where both the Fed and ECB continue to raise the specter of higher interest rates to come,” said Stuart Cole, a chief macroeconomist at Equiti Capital.

Meanwhile, U.S. rate futures have priced in an 86.2% probability of a 25 basis point rate increase and a 13.8% chance of no hike at the conclusion of the Fed’s July meeting.

In other news, China announced on Monday that it would control exports of some metals widely used in the semiconductor industry, adding further uncertainty to global trade relations. According to China’s Ministry of Commerce, unspecified export controls will be implemented on the minerals gallium and germanium starting next month.

Today, investors will be paying close attention to the release of the Federal Reserve’s minutes from the June meeting to gain further insights into the direction of monetary policy.

On the economic front, investors will likely focus on U.S. Factory Orders data, which stood at +0.4% m/m in April. Economists foresee the May figure to be +0.8% m/m.

In the bond markets, United States 10-Year rates are at 3.856%, down -0.05%.

The Euro Stoxx 50 futures are down -0.70% this morning as market participants weighed important data on regional services activity. Also, sentiment was dampened by a slowdown in China’s services activity. Losses in mining and financial stocks are leading the overall market lower. Data on Wednesday showed that Eurozone business activity contracted in June, driven by a broad-based downturn in the dominant services industry and a further decline in factory output. Meanwhile, Citigroup slashed its 2023 economic growth forecast for the euro area by 0.3 percentage points to 0.8% amid pressures from a high interest rate environment. In corporate news, shares of Keller Group Plc (KLR.LN) surged over +11% after the engineering contractor said it anticipates its full-year underlying operating profit to exceed market expectations significantly.

Spain’s Services PMI, Italy’s Services PMI, France’s S&P Global Composite PMI, France’s Services PMI, Germany’s Composite PMI, Germany’s Services PMI, Eurozone’s S&P Global Composite PMI, Eurozone’s Services PMI, U.K.’s Composite PMI, U.K.’s Services PMI, and Eurozone’s PPI data were released today.

The Spanish June Services PMI has been reported at 53.4, weaker than expectations of 55.5.

The Italian June Services PMI was at 52.2, weaker than expectations of 53.0.

The French June S&P Global Composite PMI came in at 47.2, weaker than expectations of 47.3.

The French June Services PMI stood at 48.0, in line with expectations.

The German June Composite PMI came in at 50.6, weaker than expectations of 50.8.

The German June Services PMI was at 54.1, in line with expectations.

Eurozone June S&P Global Composite PMI has been reported at 49.9, weaker than expectations of 50.3.

Eurozone June Services PMI stood at 52.0, weaker than expectations of 52.4.

U.K. June Composite PMI was at 52.8, in line with expectations.

U.K. June Services PMI arrived at 53.7, in line with expectations.

Eurozone May PPI came in at -1.9% m/m and -1.5% y/y, weaker than expectations of -1.8% m/m and -1.3% y/y.

Asian stock markets today closed in the red. China’s Shanghai Composite Index (SHCOMP) closed down -0.69%, and Japan’s Nikkei 225 Stock Index (NIK) closed down -0.25%.

China’s Shanghai Composite today closed lower after data pointed to a slowdown in the country’s services activity, while escalating U.S.-China tensions also weighed on sentiment. A private-sector survey on Wednesday showed that China’s services activity expanded at the slowest pace in five months in June, primarily due to weakened demand that affected the post-pandemic recovery momentum. The reading, which comes after disappointing figures on manufacturing activity, indicates a slowdown in growth during the second quarter as China’s major economic drivers lose momentum. Meanwhile, an influential trade policy adviser said Wednesday that China’s export controls on metals used in semiconductor production are “just a start,” highlighting the availability of additional sanction measures and tools at the country’s disposal. Shares of certain Chinese metals companies surged for a second session due to concerns about supply, which could potentially drive up the prices of these two metals, with Yunnan Lincang Xinyuan Germanium Industry and Yunnan Chihong Zinc & Germanium Co soaring +10%. In other news, Hong Kong-listed Chinese banking shares plunged on Wednesday after Goldman Sachs downgraded top lenders, including Agricultural Bank of China and Industrial and Commercial Bank of China, in a report that raised concerns over the whole sector.

The Chinese June Caixin Services PMI stood at 53.9, weaker than expectations of 56.2.

Meanwhile, the Reserve Bank of Australia kept its cash rate unchanged at an 11-year high of 4.10% on Tuesday. This decision reflects the RBA’s intention to assess the effects of the previous 400 basis points of rate hikes implemented since last May on the broader economy. At the same time, Australia’s central bank indicated that additional tightening measures may be necessary to bring down elevated price growth. “Inflation is still too high and will remain so for some time yet,” warned RBA governor Philip Lowe in a statement.

Japan’s Nikkei 225 Stock Index closed lower today as investors continued to book profits after a recent rally. Data on Wednesday indicated the resilience of the Japanese economy as service sector activity expanded further in June. Meanwhile, Fast Retailing slid over -2% and was among the top percentage losers on the Nikkei after the Uniqlo brand owner posted a 3.4% decline in same-store sales for June. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed down 1.53% to 19.27.

The Japanese June Services PMI came in at 54.0, weaker than expectations of 54.2.

Pre-Market U.S. Stock Movers

Netflix Inc (NFLX) gained about +1% in pre-market trading after Goldman Sachs upgraded the stock to Neutral from Sell.

Biomarin Pharmaceutical Inc (BMRN) rose more than +1% in pre-market trading after BMO Capital upgraded the stock to Outperform from Market Perform.

Steel Dynamics Inc (STLD) fell about -1% in pre-market trading after Exane BNP Paribas downgraded the stock to Neutral from Outperform.

Adaptive Biotechnologies Corp (ADPT) climbed over +6% in pre-market trading after JPMorgan assumed coverage of the stock with an Overweight rating.

BorgWarner Inc (BWA) plunged over -11% in pre-market trading after the company said it had completed the spin-off of its Fuel Systems and Aftermarket segments into a separate, publicly-traded company named PHINIA.

You can see more pre-market stock movershere

Today’s U.S. Earnings Spotlight: Wednesday - July 5th

Daktronics (DAKT), Seanergy Maritime (SHIP).

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On the date of publication, Oleksandr Pylypenko 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.