U.S. Stocks Mixed With Focus on Taiwan and T-note Yield

Rich Asplund - Barchart - Mon Aug 1, 2022

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.16%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.15%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.34%. U.S. stock indexes are seeing downward pressure from U.S.-China tensions, weak Chinese PMI data, and hawkish Fed comments. By contrast, stocks are seeing support from today’s stronger-than-expected U.S. ISM manufacturing index and the larger-than-expected decline in the July ISM prices-paid sub-index. Stocks are also seeing support from today’s decline in the 10-year T-note yield.

U.S.-Chinese tensions regarding Taiwan remain high after China’s Foreign Ministry spokesman today 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 said whether she will stop in Taiwan. Taiwan media outlets are reporting that Ms. Pelosi could arrive Tuesday or Wednesday to meet with Taiwanese President Tsai Ing-wen and other 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’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.

Today’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 this morning 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 are mostly higher today on carry-over support from last Friday’s rally in U.S. stocks. The Euro Stoxx 50 today is up +0.07%, adding to last Friday’s +1.53% rally. The Nikkei index today closed up +0.69%. China’s Shanghai Composite Index today closed up +0.21% despite the weak Chinese PMI reports seen over the weekend.

Today’s stock movers…

Energy stocks and energy service producers are sharply lower today, with September WTI crude oil futures falling -4.5% due in part to the poor weekend Chinese PMI reports. Oil company stocks are among the largest losers in the S&P 500, with Halliburton (HAL) down -4.98%, Marathon Oil (MRO) down -4.09%, Hess down -3.96%, and Schlumberger (SLB) down -3.86%. Exxon (XOM) is down -2.10%.

Bitcoin (^BTCUSD) is down -2.4% this morning, falling back after reaching a 1-1/2 month high on Saturday. Bitcoin rallied by +27% in July on a partial recovery from its epic slump seen earlier this year. Coinbase (COIN) is down -1.11%, and Marathon Digital (MARA) is down -1.67%, although Riot Blockchain (RIOT) and Bit Digital (BTBT) are trading higher.

Colgate-Palmolive Co (CL) is up +1.77% after Wells Fargo (CL) upgraded the stock to equal-weight from underweight due to its view of an improved earnings outlook.

Comcast (CMCSA) is down -0.61% after Barclays cut the stock to equal-weight from overweight and said cable companies are “likely past peak growth.”

Sony Group Corp (SONY) is down -0.07% after the company cut its earnings outlook amid concerns that weaker global economic growth may hurt consumer spending.

Pepsico (PEP) is up +0.89% 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 is sharply higher by +12% today on the news.

Across the markets…

Sep 10-year T-notes (ZNU22) this morning are up +9 ticks, and the 10-year T-note yield is down -4.7 bp at 2.602%. T-note prices are seeing support from today’s decline in the 10-year inflation expectations rate by -6.0 bp to 2.493% due to today’s sharp -4.5% sell-off in crude oil prices and today’s sharp -18.5 point drop to 60.0 in the July U.S. ISM prices-paid sub-index. The T-note market shook off hawkish remarks by Minneapolis Fed President Kashkari over the weekend.

The dollar index (DXY00) this morning is down by -0.47%. The dollar index is trading lower on lower U.S. inflation expectations and today’s decline in the 10-year T-note yield. The dollar has been under pressure since last week when the back-to-back declines in U.S. GDP growth in the first half (Q1 -1.6%, Q2 -0.9%) caused the markets to shift to a less hawkish view of Fed policy. EUR/USD (^EURUSD) is up by +0.42% today and USD/JPY (^USDJPY) is down -0.87%.

August gold (GCQ22) this morning is up +6.2 (+0.35%), and September silver (SIU22) is up +0.103 (+0.51%). Precious metals this morning are moving higher, with both gold and silver posting new 1-month highs. Gold and silver prices are seeing support from the weaker dollar and continued short-covering pressure after the sharp declines seen earlier this year. Silver is trading higher despite the weak Chinese manufacturing PMI reports released over the weekend.

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