Weekly Market Update: Risk appetite remains weak amid China and CPI concerns
Global stock markets lost additional ground this week as rising interest rates and China worries continued to plague risk appetite. The Hang Seng officially fell into bear market territory after the S&P broke below its 50-day moving average earlier in the week. Chinese officials were forced to announce another round of patchwork stimulus measures and proclamations, while also intervening in foreign exchange markets to defend the yuan. On Friday, China’s Evergrande Group filed for Chapter 15 bankruptcy protection from creditors in New York, seeking approval to restructure >$19.0B in offshore debts.
Outside of China, signs suggested growth is holding up well, perhaps better than many had expected. Despite facing real headwinds, the US consumer appears to be resilient. US July retail sales came in well ahead of estimates while key earnings reports from Home Depot and Walmart remained solid. Strong Industrial production and housing starts data forced the Atlanta Fed to raise their Q3 GDP now forecast to a whopping 5.8%. UK CPI and wage data ran hot leaving the door open for additional BOE rate hikes. The FOMC minutes also reminded investors that a most Fed officials still believed there is work to be done on inflation when the met back in July. Against that back drop rates tracked significantly higher. Particularly at the long end of the US curve where buyers all but disappeared until Friday when safe have flows emerged. The US 30-year yield peaked above 4.4% for the first time since 2011, and the 10-year topped 4.3% resulting in ongoing de-inverting of the US curve. Most sessions saw weakness in technology and bank shares drag the major stock indices lower. For the week, the S&P lost 2.1%, the DJIA was off 2.2%, and the Nasdaq fell 2.6%.
Corporate news this week was led by earnings reports from a number of big box stores. Walmart beat expectations and raised guidance, saying inventory is in good shape and back to school sales are faring well. Target had mixed results, warning of continued near-term challenges on the topline. Home Depot held its ground with solid earnings, though management noted continued pressure in certain big-ticket, discretionary categories. Cisco Systems was a rare winner amongst big tech names this week as it reported strong quarterly results and said that a lot of large customers are making big commitments. Despite reporting strong earnings on Friday and raising guidance, shares of Deere got plowed under, erasing last month’s gains, due to concerns that the current cycle of rising demand for agricultural equipment may have peaked. Hawaiian Electric’s market cap was decimated as suspicions grew that its downed power lines may have contributed to a devastating wildfire on Maui, with reports suggesting the utility may seek refuge in restructuring actions. CVS shares experienced there biggest one day drop in years as Blue Shield of California announced a new pharmacy care model that would move toward using Amazon Pharmacy to fill prescriptions.
US Steel was the highlight of M&A news this week. Most of the American steel sector names jumped in the wake of US Steel announcing a strategic alternatives process after receiving 'multiple' unsolicited proposals and rejecting a $7.25B opening bid from Cleveland Cliffs.
SUN 8/13
X Cleveland-Cliffs proposed to acquire U.S. Steel in ~$7.25B cash-stock deal; the implied total consideration value is $35/share (~54% premium to prior closing price); the offer was rejected by U.S. Steel's board
X Announces strategic alternatives process after 'multiple' unsolicited proposals; Confirms received and rejected CLF offer; Cleveland-Cliffs refused to engage in the necessary and customary process to assess valuation and certainty unless US Steel agreed to the economic terms of the proposal in advance
MON 8/14
QCOM Said to have cut prices on chips for low-mid end 5G smartphones by 10-20% amid weak demand continuing - Taiwanese press
2317.TW Reports Q2 (NT$) Net 33.0B v 25.9Be, Op 30.9B v 33.2Be, Rev 1.31T v 1.34Te; Cuts FY23 Rev outlook
2317.TW Exec: Demand has returned to normal following COVID pandemic; AI server demand continues to strongly increase - post earnings comments
(US) US-Japan agreement to develop hypersonic missile interceptor expected to be signed at Biden-Kishida meeting on Fri, Aug 18th - press
(CN) China reportedly sets up taskforce for its largest asset fund manager, Zhongzhi Enterprise Group (ZEG) following missed trust payments - press
(CN) CHINA COMMERCE MINISTRY (MOFCOM) OFFICIAL: CHINA TO PUSH FOR NARROWING NEGATIVE LIST FOR FOREIGN FIRMS; STUDYING POTENTIAL REDUCTION OF IT
(CN) JPMorgan analysts see missed payments by Chinese trust firms may trigger a “vicious cycle” for China property developers’ financing and more delinquencies for trust products; See CNY2.8T (~$380B) trust assets face default risks
(IN) INDIA JULY CPI Y/Y: 7.4% V 6.4%E (moves back above target range for 1st time in 5 months)
(US) S&P Global: Demand conditions, which remain very depressed globally, declined at even sharper rates in Europe and the UK in July; North American demand conditions were less depressed than in June
(CN) China cities said plan loosening home purchase limits and to lower down payment for 2nd home buyers - Chinese press
(US) EIA: Forecasts US total shale regions oil production for Sept forecast -19K bpd to 9.415M bpd v -15K bpd expected in Aug; Output set to shrink for a second straight month in Sept for the first time since early 2022
X Esmark Inc. announces all-cash public offer for U.S. Steel shares for $35/shr
JBSS3.BR Reports Q2 (BRL) Net -263M v 356Me, Rev 89.4B v 90Be
(US) House Speaker McCarthy said to consider short-term continuing resolution to avoid Oct 1st shutdown - US press
(JP) JAPAN Q2 PRELIMINARY GDP Q/Q: 1.5% V 0.8%E; GDP ANNUALIZED Q/Q: 6.0% V 2.9%E
SLG Fitch cuts rating to BB+ from BBB- [lowest level of investment grade]; Outlook Negative
(CN) CHINA INJECTS CNY401B IN 1-YEAR MEDIUM TERM LENDING FACILITY (MLF); CUTS MONTHLY SETTING RATE BY 15BPS TO 2.50%
(CN) CHINA PBOC CUTS MLF RATE BY 15BPS TO 2.50% (not expected)
(CN) CHINA JULY INDUSTRIAL PRODUCTION Y/Y: 3.7% V 4.3%E
(CN) CHINA JULY RETAIL SALES Y/Y: 2.5% V 4.0%E [slowest growth since Dec 2022]
TUES 8/15
(UK) JUN AVERAGE WEEKLY EARNINGS 3M/Y: 8.2% V 7.4%E
(CN) CHINA SAID TO CONSIDER CUTTING STAMP DUTY TO REVIVE SLUMPING STOCK MARKET (**Note: would be the 1st time since 2008)
MKS.UK Q1 Trading Update: Expect H1 results to show 'significant improvement against previous expectations'
(UK) Kantar announces 12 week grocery market share and sales: UK grocery price inflation rose by 12.7% y/y in the four weeks to Aug 6th v 14.9% prior (biggest monthly drop since 2008 and 5th consecutive fall)
(CN) CHINA PBOC CUTS STANDING LENDING FACILITY (SLF) RATES BY 10BPS FOR THE OVERNIGHT, 7-DAY AND 1-MONTH MATURITIES [2nd cut this summer]
(US) Fitch analyst warns it may have to downgrade 'dozens' of US banks, even including banks as big as JPMorgan, in case of another one notch downgrade of US banking industry - CNBC interview
(CA) CANADA JULY CPI M/M: 0.6% V 0.3%E; Y/Y: 3.3% V 3.0%E (annual pace back above BOC target range)
(US) JULY ADVANCE RETAIL SALES M/M: 0.7% V 0.4%E; RETAIL SALES (EX-AUTO) M/M: 1.0% V 0.4%E
HD Reports Q2 $4.65 v $4.46e, Rev $42.9B v $42.3Be; Announces new $15B share buyback; Did see continued pressure in certain big-ticket, discretionary categories
HD Exec: As weather improved in Q2 we saw an increase in Spring sales, July comp sales were almost flat - earnings call comments
(US) AUG NAHB HOUSING MARKET INDEX: 50 V 56E
(US) Atlanta Fed GDPNow: Raises Q3 GDP forecast from 4.1% to 5.0%
A Reports Q3 $1.43 v $1.37e, Rev $1.67B v $1.66Be; Cuts FY guidance citing softer macroeconomic environment
(US) Weekly API Crude Oil Inventories: -6.2M v +4.1M prior
(US) UAW President says contract negotiations are going 'too slow'; UAW said to direct locals around the US to schedule strike authorization vote as soon as possible, likely next week, Send results to UAW International by day's end on Aug 24th - US financial press
COHR Reports Q4 $0.41 v $0.38e, Rev $1.21B v $1.15Be; Guides Q1 and FY24 below consensus
(CN) Zhongrong International trust said to miss 'dozens' of payments on various instruments – Press
WED 8/16
(UK) JULY CPI M/M: -0.4% V -0.5%E; Y/Y: 6.8% V 6.7%E (slowest annual pace since Feb 2022)
300750.CN Unveils new 'superfast charging' long-range battery Shenxing with 400km charged in 10 minutes; World's first LFP battery to achieve 4C superfast charging; Mass production expected by end-2023 - New product presentation
(CN) CHINA SAID TO BE ASKING SOME FUNDS TO AVOID NET EQUITY SALES THIS WEEK; SPECULATION IS GROWING THAT CHINA GOVT WILL ROLL OUT MORE STEPS TO PROVIDE SUPPORT - PRESS
700.HK Reports Q2 (CNY) adj Net 37.5B v 36.3Be, Rev 149.2B v 152.0Be
JD Reports Q2 (CNY) 5.39* v 4.06 y/y, Rev 287.9B v 279.2Be
TGT Reports Q2 $1.80* v $1.43e, Rev $24.8B v $25.4Be; Cuts FY23 outlook citing 'recent sales trends'; Expects continued near-term challenges on the topline
TJX Reports Q2 $0.85 v $0.76e, Rev $12.8B v $12.4Be; Raises FY24 outlook as Q3 is 'off to a very strong start'; Notes customer traffic increased at every division
Fitch: GDP in largest developed economies will not return to pre-COVID-19 pandemic path, even in medium-term
TGT CEO Cornell: Comp trends softened from backhalf of May into Jun before seeing a meaningful Jul recovery in traffic, comps - earnings call
(US) JULY HOUSING STARTS: 1.452M V 1.450ME; BUILDING PERMITS: 1.442M V 1.463ME
(US) DOE CRUDE: -6.0M V -1.5ME; GASOLINE: -0.3M V -1ME; DISTILLATE: +0.3M V 0ME
(US) Atlanta Fed GDPNow: Raises Q3 GDP forecast from 5.0% to 5.8%
X Reportedly ArcelorMetal is consulting with bankers about a potential bid for US Steel - press
HE Said to be talking with restructuring firms to deal with fallout from the Maui fires – press
CSCO Reports Q4 $1.14 v $1.06e, Rev $15.2B v $15.0Be
CSCO Exec: Cisco saw a lot of big customers making big commitments, which is a positive thing; Expects to see more normal ordering patterns - earnings call comments
(AU) AUSTRALIA JULY EMPLOYMENT CHANGE: -14.6K V +15.0KE; UNEMPLOYMENT RATE: 3.7% V 3.6%E (first negative jobs report since Apr, and largest fall since Dec 2022)
(CN) China Trust Co. Zhongzhi (ZEG) confirms plans for debt restructuring, hires KPMG to conduct audit of its balance sheet - financial press
THRS 8/17
992.HK Reports Q1 Net $176.5M v $516M y/y, Rev $12.9B v $17.0B y/y
(US) US reportedly set to escalate claim Mexico corn policy violates trade deal - press
(CN) China Commerce Ministry (MOFCOM): China evaluating impact of US Pres Biden's investment rules; Reviewing exporters' applications on rare chip metals; Welcomes US Commerce Sec Raimondo's planned visit to China
MAERSKB.DK Market Update: In recent weeks, we received an increased number of requests for adding inland shipping to ocean bookings; Peak shipping season for cargo travelling from China to Europe in line with previous years the network, expected to be very busy until Oct as retailers stock their shelves ahead of the holiday season
(US) BofA Institute: week-to-Aug 12th total card spending +0.6% y/y; Notes gas spending growth y/y, likely due to the pickup in gas prices, but spending dropped in many other major categories y/y
(US) San Francisco Fed: Estimates US consumers have ~$190B of excess savings left v ~$500B in early May 2023; Likely be depleted during the current quarter
(CN) CHINA REPORTEDLY TOLD STATE BANKS TO ESCALATE YUAN INTERVENTIONS THIS WEEK - PRESS
(US) US reportedly planning new tariffs on food-can metal from China, Germany and Canada - US press
WMT Reports Q2 $1.84 v $1.69e, Rev $161.6B v $159.8Be; Raises again FY24 outlook; Says in good shape with inventory
WMT Back-to-school categories performed well; US grocery inflation increased in high-single digits in Q2 but moderated 400bps q/q; Notes strong market share gains in grocery - earnings slides
LITE Reports Q4 $0.59 v $0.56e, Rev $370.8M v $368Me; Guides Q1 weak as expects current customer inventory correction cycle will continue and its shipments will be below end-market demand
CVS Blue Shield of California confirms new pharmacy care model designed to fix problems in today's 'broken prescription drug system' and save up to $500M in annual drug costs; Amazon Pharmacy will provide fast and free delivery of prescription medications
(US) INITIAL JOBLESS CLAIMS: 239K V 240KE; CONTINUING CLAIMS: 1.716M V 1.70ME
(US) AUG PHILADELPHIA FED BUSINESS OUTLOOK: +12.0 V -10.2E (1st positive print in 1 year); New Orders: +16.0 v -15.9 prior
(US) Mid August Manheim wholesale used vehicle Index at 212, +0.1% m/m, -7.8% y/y (first M/M increase in 4 months)
AMAT Reports Q3 $1.90 v $1.73e, Rev $6.43B v $6.16Be; Guides Q4 above consensus, but notes weakness in leading-edge foundry, logic, and NAND
(UR) US official: US has approved sending F-16s from Denmark and Netherlands to Ukraine as soon as pilot training is completed
(JP) JAPAN JULY NATIONAL CPI Y/Y: 3.3% V 3.3%E; CPI EX FRESH FOOD (CORE) Y/Y: 3.1% V 3.1%E
(US) Maui Emergency Management Agency Head Herman Andaya said to resign, effective immediately - local media
08/17 USD/CNY (CN) China PBOC sets Yuan reference rate: 7.2006 v 7.2076 prior
FRI 8/18
(CN) China Securities Regulator (CSRC): Vows to lower trading costs to boost capital market and investor confidence [as speculated]
(EU) EURO ZONE JULY FINAL CPI Y/Y: 5.3% V 5.3%E; CPI CORE Y/Y: 5.5% V 5.5%E
(UR) According to US intel community assessment, Ukraine’s counteroffensive will likely fail to reach key southeastern city Melitopol and will not fulfill its key objective of severing Russia’s land bridge to Crimea this year - WaPo
(US) UAW President Fain: Detroit Three automakers are still not serious in their responses so far to UAW union's economic proposals; Things have been moving slow; Sept 14th is a firm deadline
DE Reports Q3 $10.20 v $8.12e, Equipment Ops Rev $14.3B v $14.2Be; Raises most FY23 guidance; Notes stabilizing conditions in the supply chain
EL Reports Q4 +$0.07 v -$0.04e, Rev $3.61B v $3.49Be; Guides FY24 below estimates; Expect to return to Organic Rev growth in 2024 and deliver progressive margin recovery
(US) Weekly Baker Hughes Rig Count: 642 v 654 prior (-1.8% w/w)
(KR) US, Japan and S. Korea call for peace, stability in Taiwan Strait; To launch working group on N. Korea cyber threats, evasion of sanctions - Trilateral Summit