Stock Index Futures Drop as Investors Weigh Powell’s Remarks, Geopolitical Risks

Oleksandr Pylypenko - Barchart - Fri Oct 20, 2023

December S&P 500 futures (ESZ23)are down -0.25%, and December Nasdaq 100 E-Mini futures (NQZ23) are down -0.32% this morning as investors digested Federal Reserve Chair Jerome Powell’s remarks while heightened geopolitical risks stemming from the Middle East continued to weigh on sentiment.

In Thursday’s trading session, the benchmark S&P 500, blue-chip Dow, and tech-heavy Nasdaq 100 posted 1-1/2 week lows. Tesla Inc (TSLA) slumped over -9% after the Austin-based company posted weaker-than-expected Q3 results. In addition, Genuine Parts Co (GPC) tumbled more than -12% after reporting weaker-than-expected Q3 net sales. On the bullish side, Netflix Inc (NFLX) soared over +16% after the company reported stronger-than-expected Q3 EPS, posted its best subscriber growth in years, and confirmed it would start raising prices. Also, AT&T Inc (T) climbed more than +6% after the telecom giant raised its full-year free cash flow guidance.

The Labor Department’s report on Thursday showed claims for state unemployment benefits unexpectedly fell -13K to an 8-3/4 month low of 198K last week, stronger than expectations of 212K. Also, the U.S. Philly Fed’s gauge of manufacturing activity stood at -9.0 in October, weaker than expectations of -6.4. In addition, U.S. September existing home sales fell -2.0% m/m to a nearly 13-year low of 3.96M, compared to a consensus of 3.89M.

Federal Reserve Chairman Jerome Powell, speaking at the Economic Club of New York, acknowledged in his prepared remarks on Thursday that lower inflation readings during the summer were “a very positive development” while also emphasizing that inflation was still too high. Also, during the Q&A session, Powell stated that there was evidence that monetary policy was not “too tight” right now, and he added that Federal Reserve officials would proceed carefully with interest-rate hikes.

“Powell continued to leave optionality open for the Fed, in terms of future rate hikes, but did nothing to change the narrative that the Fed will keep rates unchanged at their next meeting and is relatively likely to keep them unchanged for the rest of this year as well,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

Meanwhile, U.S. rate futures have priced in a 98.5% chance of no hike at the November meeting and a 24.2% probability of a 25 basis point rate increase at the December FOMC meeting.

On the earnings front, notable companies like American Express (AXP) and Schlumberger (SLB) are set to report their quarterly earnings today.

In other news, oil rose over +1% amid concerns of a potential escalation over the weekend that could spread the conflict between Israel and Hamas to the wider Middle East region.

The U.S. economic data slate is mainly empty on Friday. However, investors will likely focus on speeches from Philadelphia Fed President Patrick Harker and Cleveland Fed President Loretta Mester.

In the bond markets, United States 10-year rates are at 4.945%, down -0.92%.

The Euro Stoxx 50 futures are down -0.71% this morning as growing concerns over a wider Middle East conflict and disappointing earnings reports kept investors away from risky assets. Mining, financial, and travel stocks underperformed on Friday. Data from the Office for National Statistics showed Friday that U.K. retail sales declined more than anticipated in September. Separately, industry data showed on Friday that new car sales in the European Union increased by +9.2% y/y in September, driven by a surge in sales of electric and hybrid vehicles. In corporate news, Husqvarna Ab (HUSQB.S.DX) slumped over -5% after the Swedish garden equipment maker’s Q3 revenue missed expectations. Also, Tomra Systems ASA (TOM.O.DX) tumbled more than -18% after the company posted downbeat Q3 results.

U.K.’s Core Retail Sales, U.K.’s Retail Sales, and Germany’s PPI data were released today.

U.K. September Core Retail Sales stood at -1.0% m/m and -1.2% y/y, weaker than expectations of -0.4% m/m and -0.2% y/y.

U.K. September Retail Sales came in at -0.9% m/m and -1.0% y/y, weaker than expectations of -0.2% m/m and -0.1% y/y.

The German September PPI arrived at -0.2% m/m and -14.7% y/y, weaker than expectations of +0.4% m/m and -14.2% y/y.

Asian stock markets today closed in the red. China’s Shanghai Composite Index (SHCOMP) closed down -0.74%, and Japan’s Nikkei 225 Stock Index (NIK) closed down -0.54%.

China’s Shanghai Composite today closed lower amid persistent concerns about the health of the country’s property sector, alongside worries arising from the intensifying Middle East conflict and rising U.S. bond yields. The People’s Bank of China held its benchmark lending rates unchanged on Friday, as anticipated after the central bank kept its policy rates steady earlier this month. Also, China’s central bank injected a record-high amount of liquidity, providing lenders with a net 733 billion yuan of cash through reverse repurchase contracts on Friday. Meanwhile, Morgan Stanley recommended refraining from purchasing Chinese equities on the dip due to the expectation that market sentiment would likely remain fragile. In other news, China Evergrande Group said Friday it was revising the terms of a proposed offshore debt restructuring deal to align with the company’s circumstances and the preferences of creditors, although specific details were not disclosed.

“Current weakness in the market is mainly due to liquidity - the selling of foreign investors hit market sentiment and offset the effect of other good news,” said analysts at Bohai Securities.

Japan’s Nikkei 225 Stock Index closed lower today, tracking Wall Street’s overnight weak finish, primarily due to concerns over potential interest rate hikes in the United States and an escalation in tensions in the Middle East. Healthcare stocks outperformed on Friday, with Daiichi Sankyo Co Ltd soaring over +14% after the drug maker announced a $5.5 billion agreement with Merck to collaborate on the development of its three precision cancer drug candidates. Data showed on Friday that Japan’s core inflation rate fell below the 3% threshold for the first time in over a year, a sign that cost-push pressure was easing. Meanwhile, the Bank of Japan intervened in the Japanese government bond market on Friday for the fifth time this month after the 10-year yield reached a new decade high. In other corporate news, Nishimatsuya Chain Co Ltd climbed more than +14% as an activist investor, Effissimo Capital, disclosed a 5.63% stake in the children’s clothing store operator. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed up +3.25% to 23.20.

The Japanese September National Core CPI stood at +2.8% y/y, stronger than expectations of +2.7% y/y.

Pre-Market U.S. Stock Movers

SolarEdge Technologies Inc (SEDG) plunged about -23% in pre-market trading after cutting its Q3 revenue outlook, citing “substantial unexpected cancellations and pushouts of existing backlog from our European distributors.”

Knight-Swift Transportation (KNX) soared over +16% in pre-market trading after the company reported upbeat Q3 results.

Intuitive Surgical Inc (ISRG) slid more than -8% in pre-market trading after the maker of robotic-assisted surgical systems posted weaker-than-anticipated Q3 revenue.

Hewlett Packard Enterprise Co (HPE) fell over -3% in pre-market trading after the company provided a disappointing FY24 outlook.

Union Pacific Corporation (UNP) rose about +1% in pre-market trading after Deutsche Bank upgraded the stock to Buy from Hold.

You can see more pre-market stock movershere

Today’s U.S. Earnings Spotlight: Friday - October 20th

American Express (AXP), Schlumberger (SLB), Regions Financial (RF), Huntington Bancshares (HBAN), IPG (IPG), Autoliv (ALV), Comerica (CMA), Euronet (EEFT), First Bancorp (FBP), Sensient Technologies (SXT), Hilltop (HTH), OFG Bancorp (OFG), Berkshire Hills Bancorp (BHLB), World Acceptance (WRLD), Sify (SIFY).

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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.