Readers will rise on Wednesday morning and likely take note that Asian equity markets are mixed, while the rally is on in Europe. First the good news. Just yesterday, the Italian cabinet had sparked a sharp selloff in banking stocks in that country that extended at least for a few hours across the rest of Europe and into North America, by approving a 40% windfall tax on Italian banks that still required parliamentary approval.
(The US also had their own issues on Tuesday as Moody's cut its ratings on several banks, while placing a negative outlook on others.)
On Wednesday morning, Italy's Finance Ministry indicated that it would cap any windfall tax on banks at 0.1% of risk-weighted assets. According to estimates at Equita, this would limit the tax bill for Italian banks in aggregate to about E2B from a worst case estimate of E4.5B to E5B had the plan that had been approved at the cabinet level been passed by the Italian parliament into law.
While this sparked a risk-on sentiment specifically in Milan, that rally has extended broadly across the European continent. Asian traders seem unsure what to make of the data coming out of mainland China. Just last week, the Chinese government reported for July a fourth consecutive month of contraction for its Manufacturing PMI.
On Monday evening, Beijing reported that July exports had slumped 14.5% year over year while exports decreased 12.4% year over year. Lack of demand? Recession? Remember, Beijing did report a Q2 GDP that did badly miss expectations, but still accelerated from the first quarter and appeared to be that nation's strongest quarter economically since Q3 2021.
Fast Forward to Tuesday night in New York or Wednesday morning in Beijing... China's National Bureau of Statistics reported for July a headline CPI of -0.3% y/y and a headline PPI of -4.4% y/y. The Chinese economy is now mired in a state of producer level deflation that has persisted for ten consecutive months, but has teetered on the edge of consumer level deflation. Now, the Chinese economy has finally fallen into deflation on both levels.
Does this now very obvious slowdown in Chinese economic activity devolve into some kind of downward spiral in terms of growth? If these are the published numbers, what might actual ground-level conditions be like? What has this done to Chinese confidence? Does this ensure a next round of "over the top" style stimulus, of the kind Beijing has been slow to resort to coming out of that nation's failed zero-Covid policies?
One thing is certain. Anyone waiting around for the Chinese economy to drive global GDP like it had during the 2010's, probably should start diversifying that search for any broad generation of increased velocity.
Marketplace
On Tuesday, Wall Street opened on weakness across both equities and commodities as dollar valuations and Treasury prices stabilized. That weakness persisted into mid-morning when the bulls showed up. Most of our mid-major to major equity indexes never did make it back into the green for the day, but they did rally over the final five hours of the regular session rather steadily.
WTI Crude rallied aggressively after finding support at $80 per barrel early on Tuesday morning. I saw WTI Crude trading above $83.50 this morning after the API inventories print hit the tape with a surprise build last night.
As for equities, just take a look at this one day chart of the S&P 500...
The index spent most of the final two hours flirting with an intraday state of being technically overbought, which is incredible for a "down" day. The S&P 500 gave up 0.42% for the session, while the Nasdaq 100 surrendered 0.87%. The semis and banks were slapped around, as were the small to mid-caps, but they all showed strength over the final five hours. Interestingly, excluding the open and close, which are always high volume events, the chart above appears to show greater trading volume during the 90 minute selloff than during the five hour rally. The internals seem to confirm this.
Eight of the eleven S&P SPDR ETFs shaded red on Tuesday. Two of the top three performing sectors were defensive in nature, led by Health Care (XLV) , which was up 0.77%. The three worst performing sectors were all "cyclicals" with Materials (XLB) giving up 1.06%. That broad strength in Health Care might be somewhat deceiving. The Dow Jones US Pharmaceutical Index gained 3.81% on Tuesday as Eli Lilly (LLY) ran 14.87%. The other four industries that comprise the sector (Bio-tech, Medical Supplies, Providers, and Medical Equipment) all displayed industry-specific indexes that shaded red for the session.
Losers still beat winners by a rough 7 to 4 at the NYSE and by about 3 to 2 at the Nasdaq. Advancing volume took just a 32.8% share of composite NYSE-listed trade, and a 43.4% share of composite Nasdaq-listed volume. Aggregate trading volume increased significantly across NYSE-listings, across Nasdaq-listings, and both the S&P 500 and Nasdaq Composite.
The short of it is that though stocks did rally over a majority of the day on Tuesday, that the tape was still red and all indications are that professional money did move toward distribution overall, even if they did buy back partials later at lower prices. The final two hours smelled a little like algorithmically forced momentum if you ask me.
About Crude
While WTI Crude did show some softness in response to overall Chinese economic weakness on Tuesday morning, the rebound since has been fierce. What happened? Ukrainian President Volodymyr Zelenskyy warned that if Russia continued to block his nation's ports, constricting exports of grain, that there would be retaliation.
Kyiv did hit a Russian oil tanker over the weekend and about 80% of Kazakhstan's oil exports rely upon safe passage through the Black Sea. In addition, Saudi Arabia, apparently taking advantage of the news flow, decided almost out of nowhere, to reaffirm its commitment to continue its voluntary production cuts next month.
One Question Answered
Twenty-four hours ago, we wondered here in this column how demand, especially foreign demand, would go for the $103B in auctions of Three Year and Ten Year Notes and Thirty Year Bonds this week. Well, if this afternoon's and tomorrow's auctions go as well as did Tuesday's, we'll be just fine. For now.
Never mind the Fitch downgrade. Never mind the latest news around Bill Ackman and his US Treasury positions. On Tuesday afternoon, the US Treasury sold $42B worth of Three Year Notes at a high yield of 4.398%, down from last month's 4.534%. Bid to cover ran at 2.901%, up from 2.882% last month, and from here it gets even better.
Indirect (foreign) bidders took down 74% of the issuance, which is their highest aggregate share on record for this series. Direct bidders were awarded 15.7% of the issue, while dealers were "stuck" with just 10.3% of these notes, which is a record low for this series. Grade this auction an A+.
This afternoon, the US Treasury goes to market with $38B worth of brand new Ten Year Notes and on Thursday afternoon, the Treasury will "raffle" off $23B worth of Thirty Year Bonds. Let's hope these auctions go nearly as well.
Black Friday?
Try Black October. Amazon (AMZN) announced on Tuesday that the firm will hold a major shopping event in October this year as they did last year. Last year, Amazon held Prime Day sales events in both July and October. This year's July Prime Day event resulted in roughly $12.7B spent on 375M items, according to Adobe (ADBE) Analytics. The October event this year has not been assigned a specific date or dates as of yet, but will be referred to as "Prime Big Deal Days" and will be global.
Of course this will impact the holiday season and expectations made around that season. Retailers such as Walmart ( WMT) , Target ( TGT) , Best Buy ( BBY) , as well as many others, will be forced to respond in kind and will almost certainly pull forward seasonal sales across the industry. The question is, if by starting the holiday shopping season early, can aggregate sales end up being forced higher? Amazon apparently thinks so. The competition will just try to take share and somehow manage inventory efficiently.Small World
Disney (DIS) is due to report tonight. At least some of the news was made on Tuesday. Disney's ESPN has agreed to a $2B deal that would allow the brand name to be used by PENN Entertainment's (PENN) online sportsbook. PENN has now said that its Barstool Sportsbook app would be rebranded as ESPN Bet this autumn as part of a ten year agreement that will pay ESPN $1.5B over the life of the contract. ESPN will also receive warrants worth a rough $500M to purchase shares of PENN. Expect more on this from CEO Bob Iger tonight.
Trading
Readers may recall that I took some profits in Eli Lilly (LLY) in mid-June. In the $450's. That was after the stock had broken out from a cup with handle pattern and soared past my then $444 target.
Now the stock has broken out from a basing period of consolidation with a $470 pivot. My current target is $540. There is now an unfilled gap spanning from $455 to $502 on the chart. My thinking now is that earnings are out of the way and guidance has been raised. The entire group is on the move.
Though my newer target has still not been met, I think it prudent (meaning I am taking) to at least take some profits here as long as one stays invested in the name. I would not dare exit. The Mounjaro story is potentially just beginning.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.93%.
07:00 - MBA Mortgage Applications (Weekly): Last -3.0% w/w.
10:30 - Oil Inventories (Weekly): Last -17.049M.
10:30 - Gasoline Stocks (Weekly): Last +1.48M.
13:00 - Ten Year Note auction: $38B.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (LL) (-.41), (RBLX) (-.44), (WEN) (.27)
After the Close: (PLUG) (-.25), (TTD) (.26), (DIS) (.99), (WYNN) (.72)
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