A Reversal of Rebound Fortune

The stock market had a good day on Monday, rebounding on the back of blue chip strength, albeit on very light volume. There is still a chance that today could be another good day, but things are not going to look good at the open.

Currently, the S&P 500 futures are down 31 points and are trading 0.7% below fair value, the Nasdaq 100 futures are down 108 points and are trading 0.7% below fair value and the Dow Jones Industrial Average futures are down 246 points and are trading 0.7% below fair value.

The reversal of rebound fortune has been triggered by several catalysts with linkages to growth concerns:

• China reported some weak trade data for July that featured a 14.5% year-over-year decline in exports and a 12.4% year-over-year decline in imports. The latter marked the fastest contraction in over two years.
• UPS (UPS) disappointed with its FY23 revenue outlook, citing weakening e-commerce demand and an expectation for lower volumes following the improved labor contract. UPS is down 4.1%.
• Moody’s downgraded the credit ratings for 10 smaller U.S. banks and put some bigger banks on watch for downgrade, citing concerns about interest rates and asset-liability management risk
• U.S. exports and imports in June were both lower than exports and imports in May.

One can see the growth worries in the commodities market. WTI crude futures are down 2.3% to $80.10/bbl and copper futures are down 2.8% to $3.73/lb. They are also apparent in the Treasury market and in the strength of the dollar.

The 2-yr note yield is down three basis points to 4.74% and the 10-yr note yield is down 10 basis points to 3.98%. The U.S. Dollar Index is up 0.7% to 102.72 with the greenback benefiting largely at the expense of the euro. The euro is on the weaker side of things at the moment following the news that Italy’s government is imposing a windfall tax (40% levy on excess profits) on Italian banks.

Although Treasuries moved overnight on growth worries, Philadelphia Fed President Harker (FOMC voter) has provided some added support, noting in a speech today that he thinks the Fed may be at a point where it can be patient and hold rates steady, absent any alarming new data between now and mid-September.

Mr. Harker also asserted, though, that he thinks rates, if they are at a point of holding steady, will need to stay there for a while and that he does not see any likely circumstance for an immediate easing of the policy rate.

There was some easing in the trade deficit in June. It narrowed to $65.5 billion (Briefing.com consensus -$65.1 billion) from an upwardly revised $68.3 billion (from -$69.0 billion), as exports were $0.3 billion less than May exports and imports were $3.1 billion less than May imports.

The key takeaway from the report is the lack of growth in exports and imports, which is indicative of weaker demand overall at home and abroad.

Drug maker Eli Lilly (LLY), however, isn’t seeing weaker demand. It reported a 28.1% year-over-year increase in revenue for the second quarter in conjunction with better-than-expected earnings results. In turn, Eli Lilly raised its FY23 revenue and EPS guidance above analysts’ consensus estimates. Shares of LLY are up 8.6% in pre-market trading.

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Originally Posted August 8, 2023 – A reversal of rebound fortune