MARKET WRAPS
Watch For:
New Home Sales for July; Bank of Montreal 3Q earnings
Opening Call:
Stock futures edged up Tuesday, suggesting that gains in technology stocks will help send the S&P 500 to an all-time high, as investors awaited housing market data.
Stocks have been grinding higher as investors weigh strong corporate earnings and the economic rebound against the global surge in Covid-19 cases, which is prompting fresh restrictions in some markets. Money managers are also assessing whether the Federal Reserve may slow down plans to pare back its easy-money policies because of signs that economic growth may be slowing.
"Markets are struggling for direction a little bit after we have had a huge run," said Mike Stritch, chief investment officer at BMO Wealth Management. "People are asking, what is the next catalyst to propel the market higher, or are the handful of risks that are out there enough to collectively give people a little more pause?" he said.
Comments from Fed officials at the central bank's Jackson Hole Symposium later in the week may offer insights into the pace at which the central bank would taper bond purchases. Jerome Powell speaks virtually at the event Friday.
"I feel a little less convinced that there will be a major announcement coming up this week," said Mr. Stritch. "I don't know if now is the right time for the Fed to be overly aggressive," he said.
Data on new home sales, due at 10 a.m. ET, are expected to show an increase in July after an unexpected drop in the previous month.
Investors are also awaiting earnings from companies including Best Buy and Medtronic ahead of the opening bell. Intuit, Nordstrom and Toll Brothers are slated to release quarterly earnings reports after markets close.
Overseas, the Stoxx Europe 600 edged up 0.1%, while in Hong Kong, a strong rebound in the shares of online retailer JD. Com led a broader rally in many beaten-down Chinese internet stocks.
JD shares jumped 15% on Tuesday after the Beijing-headquartered e-commerce giant reported a 26% increase in second-quarter revenue to $39.3 billion. Tencent, which owns a stake in JD, added 8.8%, while the broader Hang Seng Index rose 2.5%. Alibaba Group Holding Ltd. rose 9.5%, ending a nine-day losing streak in Hong Kong.
Investors were encouraged by JD's better-than-expected results, but "it will take much more for a sustained rally," said Ken Wong, a portfolio manager at Eastspring Investments in Hong Kong. "Right now, there isn't really an anchor for the market. People are trading on momentum, because no one is sure if there will be new crackdowns or other negative news," he added.
Stocks to Watch:
Dow's CEO thinks the company will keep collecting hefty margins for plastics this year, even as suppliers start to replenish polyethylene inventories depleted by strong demand and plant outages.
"Most of the reason you've seen the inventory build is because it's there but it's not able to be shipped out because of supply chain related issues," said Dow CEO Jim Fitterling. "I think most of that corrects itself pretty quickly."
Fitterling said Dow shares have languished in part because the market is underestimating plastics demand and overestimating how much supply is set to come online over the next year. Some analysts have taken a bearish view, saying they expect to see polyethylene margins fall substantially over the next six months after plastics producers de-bottlenecked supplies and made small expansions in response to high prices.
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International Flavors & Fragrances agreed to sell its Microbial Control business unit to chemical company Lanxess for an enterprise value of about $1.3 billion. IFF said the sale, part of a strategic portfolio review, will enhance its financial profile and allow it to focus on core businesses.
IFF said the microbial control business is projected to have 2021 revenue of about $440 million. The deal is expected to close in the second quarter of 2022.
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JD.com's growing momentum in user additions is likely to persist, after it posted record-high net user increase in the second quarter, said CICC, maintaining an outperform rating on the company's ADRs.
The Chinese e-commerce company is likely to continue focusing on user growth by improving user experience and investing in its community group buying business. CICC raised its 2021 and 2022 earnings forecasts for JD by 16% and 13%, respectively, on the company's improved operating efficiency and economies of scale. However, CICC cut the target price by 11% to $85 to reflect a lower valuation of JD's subassets. JD's ADRs closed 3.3% higher on Monday.
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Maverix Metals offers a precious metals-focused portfolio with "a mix of over 100 producing, development and exploration assets," that offer "diverse revenue sources and organic growth opportunities," said CIBC. The bank also emphasized that the assets are in stable jurisdictions.
CIBC has forecast annual free cash flow to grow by 62% to C$54 million in 2025, "before additional acquisitions." Further, development and exploration stage assets offer significant long-term growth potential, it said. CIBC raised its target price to C$9 from C$8.50.
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Palo Alto Networks has pointed to strong momentum, with 18 customers signing 8-figure transactions in the fiscal fourth quarter and said that for the first time a customer had topped $100 million in bookings in a fiscal year. CEO Nikesh Arora, speaking during the company's earnings call, said there was a lot of room for growth, adding that work-from-home had become the new normal.
The company expects to see additional federal money flowing into the cybersecurity industry for fiscal 2023, adding that it may be too late to see the increased focus on cybersecurity reflected in the federal government's next spending plan.
Company officials, speaking on the company's earnings call, pointed to recent executive orders and said there was a "very positive mindset" in terms of leaning in and solving many of those problems. They said they hoped it would lead to positive impact for the cybersecurity industry.
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A group of unions representing workers at Florida's Walt Disney World have agreed to require their members to show proof of vaccination in the upcoming months, one of the first private sector unions to reach such a deal.
Walt Disney and the Services Trades Council Union have been negotiating the details of the vaccine mandate for a few weeks. Companies are watching to see how workers and unions respond to vaccine mandates proposed by some major American companies, including Disney, Tyson Foods and AT&T.
The deal announced Monday includes a process for getting an accommodation for those who have medical conditions or religious beliefs that preclude vaccines.
Forex:
The dollar was a touch firmer in Europe, steadying after Monday's broad losses amd ING said further selling should be limited ahead of Friday's Jackson Hole symposium and Jerome Powell's speech.
"Investors will want to wait to hear on [tapering] from Powell before pushing ahead with another major round of risk-buying, dollar-selling," said ING analysts. "We doubt investors are ready to push DXY to 92.50 just yet," said ING.
JPMorgan said both sides of the dollar smile came into play simultaneously last week and should persist. "The worsening of the Delta variant outlook only compounds peak growth concerns we have been flagging and positioned for, yet there is only a modest cyclical risk premium in the dollar."
The bank said its systematic growth framework has also turned defensive and net long the dollar as the growth outlook for 25% of countries has been materially downgraded. "Fed risks remain squarely skewed to the upside for the dollar," and the yearly Jackson Hole symposium and the September FOMC meeting remain key catalysts for a repricing of still-dovish U.S. curves.
ING said any dollar declines are likely to remain limited before Jerome Powell speaks at the Jackson Hole symposium on Friday. Ahead of the speech, which could provide clarity on the timing of tapering asset purchases, investors probably won't want to heavily add to positions in risky assets and the dollar won't sell off "too much," said ING analysts. "We suspect DXY buyers may return in the 93.20 area," referring to the dollar's safe-haven status.
Bonds:
U.S. Treasury yields edged higher as investors continue to recalibrate their expectations for Jerome Powell's important speech later this week, which could provide the clearest insights yet about the timetable and pace of rolling back Covid-era accommodations.
Analysts had been bracing for an announcement on the tapering of the Fed's $120 billion in monthly purchases of Treasurys and mortgage-backed securities before the end of the year. But given the risks to the economy from the continuing pandemic, analysts now say Powell may remain vague around the timing of any tapering process.
"Tapering speculation may cause intermittent spikes in bond yields, but we remain opportunistic because this era of low yields is likely to persist," Scott Ruesterholz, a portfolio manager at Insight Investment, wrote in note. "The Fed has pumped more liquidity into the system than can be deployed and money funds have responded by lodging $1 trillion in cash through the overnight reverse repo system. This extreme liquidity will buffer the initial impacts of tapering."
Morgan Stanley said moves in the 10-year Treasury yield may be tracking forecasts of the terminal rate for the cycle, and how many hikes in the Fed funds rate the central bank can execute before triggering the next recession.
Morgan Stanley's own measure, called Measure of the Pace of Hikes After the First Rate Hike, has fallen to below 1.7 from 2.5 since June, it said. The bank added that for much of the past four months, investors have watched the decline in the 10-year yield in "amazement," given the strength of the U.S. economy.
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08-24-21 0556ET
