Chinese markets fall on lockdowns, bank runs and default threats from property developers

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(Monday Market Open) Stock index futures are pointing down to start a newsworthy week of trading with the kick off of the second quarter earnings season and the widely anticipated index price figures. consumption (CPI) for June tomorrow.

Market potential movers

Last week’s stronger-than-expected jobs report dashed some hopes among investors that the Federal Reserve might slow its interest rate hike plans. A clearer picture may emerge this week as the CPI and Producer Price Index (PPI) are likely to be more influential in the Fed’s inflation fight.

Fed rate hikes to fight inflation helped create a stronger US dollar. And this morning, the dollar was rising again and threatening to exceed 2002 levels. The euro and the greenback are now almost at parity in the spot market and the US dollar index ($DXY) was up 0.70% before the bell this morning.

Data from Morgan Stanley (MS) and Refinitiv report that on an annual basis, every one percentage point gain in the dollar translates to about a half point drop in earnings on the S&P500 (SPX). With the dollar up about 16% over the past 12 months, S&P 500 earnings face an 8% drop.

The rising dollar is likely to be a recurring theme throughout this month’s earnings calls at multinational companies.

The Fed and investors are also dealing with a global resurgence in COVID-19 cases. The Washington Post reported Sunday that the latest omicron variant known as BA.5 is now the most dominant strain and may be the most contagious strain to date. However, Scott Gottlieb, former commissioner of the United States Food and Drug Administration and physician, pointed out on CNBC that there is no corresponding increase in deaths and only a slight increase in hospitalizations linked to this new variant. .

However, China has again increased restrictions and lockdowns related to COVID-19, which has weighed on the global economy in recent months. Macau, China’s version of Las Vegas, plans to close all casinos for a week to help stop the spread of the virus. The move affects some China-exposed casino stocks, including MGM Resorts (MGM), Las Vegas Sands (LVS), and Wynn Resorts (WYNN), all down 3.2%, 4.9% and 5.8% respectively in premarket trading.

That’s not all that’s happening in China. Authorities set up a potential run on rural banks in central Henan province that froze millions of dollars in deposits. Depositors have complained that banks are misusing a COVID-19 customer behavior app to make this decision.

Additionally, Chinese property developer Ronshine missed a bond payment over the weekend and rival Shimao missed one last week. Chinese property companies have struggled to meet their obligations for more than a year after industry giant Evergrande failed to meet its commitments. According to Bloomberg, Evergrande is still at risk of defaulting on the bonds as their recent call for a deferral was rejected by investors.

Chinese markets are feeling the pain with the Hang Seng down 2.77% and the Shanghai Composite down 1.27%.

In the energy markets, WTI Crude Futures were trading down 2.48% this morning. However, there is some tension over the Russian Nord Stream 1 pipeline being repaired, amid fears that Russian President Vladimir Putin may choose to keep the pipeline offline in order to retaliate against European sanctions against Russia for its invasion of Russia. ‘Ukraine.

Finally, Elon Musk made the news last Friday by announcing that he was giving up his offer to buy Twitter (TWTR) for $44 billion. Musk expressed concern that Twitter has not been upfront about the number of spam and bot accounts on the social media platform. The takedown could cost Musk at least $1 billion and Twitter executives are threatening to sue him for breach of contract.

Market Minutes Review

Equities ended a respectable week on a positive note with the Dow Jones Industrials ($DJI), Nasdaq ($COMP) and the S&P500 ($SPX) increasing by 0.14%, 0.11% and 0.12% respectively. Investors remained cautious after a stronger-than-expected jobs report dashed some hopes the Fed might take a less aggressive approach to raising rates.

The report found the economy added 372,000 jobs last month, well above the estimate of 268,000. Average hourly wages were in line with expectations but lower than the previous month, keeping the rate unemployment at 3.6%.

The 10-year Treasury yield (TNX) continued its ascent, gaining more than nine basis points and climbing back above 3.1%. Growth stocks appeared to shrug off the 10-year three-day rally. The S&P 500 Pure Growth Index increased by 0.37% while S&P 500 Pure Value Index fell 0.27% on the day.

WTI Crude Oil Futures continued to recoup some of its losses from last month as it settled higher, rising 2.3% to $105.06 a barrel. WTI crude has rebounded 7.5% in the past few days after falling about 20% from its June high.

Finally, the US dollar index ($DXY) attempted to rise again but sold despite the 10-year yield rising. The dollar remains close to its 52-week high set two days ago. The dollar also came within a few pips of trading at par with the euro.

CHART OF THE DAY: REVIVED. The S&P Healthcare Select Sector Index ($IXV — candlesticks) broke support in June, providing a bearish signal. However, the index rallied, creating a bear trap and a bullish flag price pattern. Using the flagpole to create a potential price target, the index could have a short-term run at the 1,400 level. Finally, the index appears to be showing relative strength (green) against the S&P 500 because is on the rise. This may be seen by some analysts as evidence of longer-term potential. Data sources: ICE, S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three things to watch out for

Stabilization: Like other defensive sectors, Health Care held up better in the bear market. Although it has not been able to completely reverse the trend like the energy sector, it has helped many of its investors to preserve the value of some of their assets.

According to Yardeni Research, at the end of June, the healthcare sector had the second-lowest valuation with a 12-month forward P/E ratio of 15.7. The financial services sector is the lowest at 11.4. Other defensive sectors like Consumer Staples (20.1) and Utilities (19.4) have much higher valuations. Yardeni also found that industry clusters within sectors such as biotechnology (12.2) and pharmaceuticals (13.5) are lower than the broader sector, but that life sciences and tools (23 .9) were much higher.

Of course, determining a valuation is about more than looking at forward PERs and there is no guarantee that a low PER will translate into higher returns. But it does provide a starting point for investors doing top-down analysis.

Who is hiring: Friday’s jobs report found that the most notable employment growth occurred in professional and business services (74,000), leisure and hospitality (67,000) and health care (57,000). Among healthcare jobs, ambulatory services grew the most, adding 28,000 jobs. It was followed by hospitals at 21,000 and residential care facilities at 8,000. This may be a good sign for health care. However, the Dow Jones US Travel and Leisure Index is down about 27% since the start of the year, so hiring data alone is not enough to make investment decisions.

Conflation: Friday, Mastercard SpendingPulse, which measures in-store and online retail sales for all payment types, found consumer spending by US consumers increased 9.5% year-over-year (YOY) in excluding automobile sales. Sales rose 6.1% year-on-year excluding autos and gasoline. However, the figures are not adjusted for inflation, which means that much of the growth could be due to rising prices.

The report showed that shoppers are also heading to physical stores, with in-store spending up 11.7% year-on-year, while e-commerce grew just 1. 1% over the same period.

This week’s CPI and retail sales reports will provide more insight into consumer strength and inflation growth.

Notable Calendar Items

July 12: PepsiCo Earnings DYNAMISM

July 13: June Consumer Price Index (CPI) and Progressive Earnings RPGFastenal QUICKand Delta Airlines DAL

July 14th : Taiwan Semiconductor’s Producer Price Index (PPI) and Revenue TSMJPMorgan Chase JPMMorgan Stanley MRScintas ETGand ConAgra GAC

July 15th : UnitedHealth retail sales and revenue A HWells Fargo WFCblack rock noirCitigroup VSand American bank USB.

July 18: Bank of America Earnings BACIBM IBMand Goldman Sachs GS

TD Ameritrade® Commentary for educational purposes only. SIPC member.

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