Market Rotation Gathers Pace On Wall Street as Rate Cut Expectations Build

Alexander Garcia
16 Jul, 2024
Miami

The market rally broadened beyond mega-cap stocks as investors jockeyed for positions ahead of the widely anticipated rate cut by the Federal Reserve. 

Stock market indexes advanced as the market rally broadened to small- and mid-cap stocks, supported by positive earnings from Bank of America, Morgan Stanley, and UnitedHealth Group. 

The S&P 500 index advanced 0.4%, and the Russell 2000 index jumped 2% and extended gains for the fifth session in a row. However, the tech-heavy Nasdaq eased, as investors lightened positions in mega-cap tech stocks. 

Market sentiment was bolstered after retail sales in June were ahead of estimates, indicating consumers are still spending.

Retail sales strength and the expected rate cut in the next three months drove investors to consumer cyclical stocks, which rely on economic conditions, namely automobile, housing, retail, and entertainment stocks. 

Retail and food services sales, not adjusted for inflation but adjusted for calendar, increased 2.3% in June, according to the monthly update released by the U.S. Census Bureau. 

May retail sales were upwardly revised to a 2.6% annual pace, but the sales increase in June slowed to a three-month low. 

Retail and food services sales were unchanged from the previous month at $704.3 billion; motor vehicles and parts sales eased to $130.7 billion from $133.3 billion; and gasoline station sales eased to $51.9 billion from $53.3 billion in the previous month, respectively. 

Nonstore retail sales increased 1.9%, gasoline station sales decreased 3%, and motor vehicle and parts dealer sales fell 2% in June from the previous month. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index increased 0.3% to 5,648.04, and the Nasdaq Composite fell 0.3% to 18,418.49.

The yield on 2-year Treasury notes edged lower to 4.47%, 10-year Treasury notes increased to 4.21%, and 30-year Treasury bonds edged higher to 4.42%.

WTI crude oil decreased $1.20 to $80.67 a barrel, and natural gas prices edged up 3 cents to $2.19 a thermal unit.

Gold increased by 20.69 to $2,442.47 an ounce, and silver rose 22 cents to $30.83. 

The dollar index, which weighs the U.S. currency against a basket of foreign currencies, edged lower to 104.39.

 

U.S. Stock Movers 

Bank of America increased 4.4% to $43.73 after the financial services company reported better-than-expected second-quarter results. 

Revenue in the quarter increased 1% to $25.4 billion from $25.2 billion, net income declined to $6.9 billion from $7.4 billion, and diluted earnings per share eased to 83 cents from 88 cents a year ago. 

Net interest income decreased 3% to $13.9 billion from $13.7 billion, and credit loss provision increased to $1.5 billion from $1.3 billion in the previous quarter and $1.1 billion in the period a year ago. 

The average deposit balance in the quarter increased by 2%, or $35 billion, to $1.9 trillion, and the company returned to shareholders $5.4 billion, $3.5 billion in stock repurchases, and $1.9 billion in stock dividends. 

Morgan Stanley advanced 1.1% to $106.65 after the investment bank reported better-than-expected quarterly results. 

Revenue in the second quarter increased to $15.0 billion from $13.5 billion, net income rose to $3.1 billion from $2.2 billion, and diluted earnings per share advanced to $1.82 from $1.24 a year ago. 

The wealth management unit's revenue increased to $6.8 billion from $6.7 billion, driven by a positive market environment and cumulative fee-based asset flows. 

Institutional securities increased to $7.0 billion from $5.7 billion, driven by higher trading activities by clients, strong investment banking fees, and a rise in debt underwriting fees. 

UnitedHealth Group rose 5.6% to $544.54 after the health insurance company reported better-than-expected quarterly results. 

Revenue in the second quarter increased to $98.9 billion from $92.9 billion, net income fell to $4.4 billion from $5.5 billion, and diluted earnings per share advanced to $4.54 from $5.82 a year ago. 

The company adjusted its full-year earnings per share outlook to between $15.95 and $16.40, reflecting the sale of its remaining stake in its South African unit. The company also completed the sale of its large Brazilian operations in the first quarter. 

 

European Indexes Extended Weekly Losses, Eurozone Trade Balance Swung to Surplus 

European markets extended losses this week as investors reviewed the latest batch of corporate quarterly results. 

Benchmark indexes in Paris, London, and Frankfurt declined amid rate-part uncertainty, valuation worry, and a weakening macroeconomic backdrop. 

Despite the domestic economic weakness, exports continue to remain a bright spot in the eurozone. 

The international trade balance swung to a surplus of Є13.9 billion in May from a deficit of Є0.4 billion the corresponding month a year ago, Eurostat reported Tuesday. 

Exports eased 0.5% to Є241.5 billion, and imports dropped 6.4% to Є227.6 billion. 

Among leading trade partners, exports to the U.S. rose 6.8% to Є44 billion, but shipments to China decreased 5.3% to Є18.1 billion, to Switzerland fell 4.3% to Є16.3 billion, and to the UK decreased 0.5% to Є28.4 billion. 

Italy's exports in May decreased by 1.7% to Є56.2 billion and imports slumped by 5% to Є49.7 billion, according to the latest data released by the statistical agency, ISTAT, on Tuesday. 

The trade surplus in May expanded to Є6.4 billion from Є4.8 in the corresponding month a year ago. 

Italy's trade surplus has been expanding in the last several months after the import price of commodities eased following Russia's invasion of Ukraine. 

 

Europe Indexes and Yields

The DAX index decreased by 0.4% to 18,518.03; the CAC-40 index fell by 0.7% to 7,580.03; and the FTSE 100 index rose by 0.2% to 8,164.90. 

The yield on 10-year German bonds edged lower to 2.49%. French bonds inched lower to 3.15%; the UK gilts inched lower to 4.11%; and Italian bonds decreased to 3.77%.

The euro edged lower to $1.09; the British pound inched higher to $1.29; and the U.S. dollar weakened to 89.36 Swiss cents.

Brent crude decreased $0.96 to $83.89 a barrel, and the Dutch TTF natural gas rose by €1.11 to €32.78 per MWh.

 

Europe Stock Movers

Hugo Boss decreased 8.4% to €37.0, and the German fashion company lowered its annual revenue outlook, citing a China-led slowdown. 

The apparel retailer lowered its full-year revenue outlook to 4.35 billion from the previous estimate of 4.45 billion. 

The company said second-quarter revenue declined 1% to $1.02 billion, driven by a fall in sales in Asia and Europe. 

Richemont increased 0.6% to CHF 137.90, and the parent company of Cartier and Mont Blanc reported a marginal increase in sales in the fiscal first quarter ending in June. 

Sales in constant currency rose 1% but declined 1% in nominal terms to Є5.27 billion from Є5.32 billion a year earlier. 

Challenging macroeconomic conditions slowed down the growth from 19% to 14% in the corresponding period a year ago. 

Sales in Japan surged 59%, in Europe advanced 5%, in the Americas gained 10%, but plunged 27% in Greater China. 

SCOR SE dropped 25.4% to €19.43 after the French insurance company said its L&H insurance service unit would deliver a loss of €0.4 billion in the second quarter. 

Rio Tinto declined 5.4% to 5,013.0 pence after the iron ore mining company reported second-quarter shipments falling short of estimates. 

Glencore, Anglo American, and Antofagasta declined between 1% and 2% after copper prices eased for the second day in a row after China reported mixed economic data on Monday. 

Ocado jumped 9.8% to 373.90 pence after the online retailer raised the profit outlook for its technology unit. 

B&M European Value Retail SA increased 4.4% to 466.40 pence after the discount retailer reported a 2.4% increase in sales in the first quarter and signaled a positive outlook for the full year. 

 

Japan Indexes Trim Morning Gains as the Yen Wobbles 

Stock market indexes dissipated morning gains after investors returned from a three-day holiday. 

The Nikkei 225 and the broader market index Topix cut morning gains as investors bid up stocks following the overnight gains in New York. 

Market indexes have struggled to resume their advance over the last month amid rate path uncertainty and the Bank of Japan's reluctance to increase rates and shrink the yawning yield gap between the U.S. and Japanese bonds. 

The lack of urgency on the part of the Bank of Japan's policymakers is weighing on the yen as domestic investors shift more attention to higher-yielding bonds and securities overseas. 

The Bank of Japan is expected to announce its monthly purchase plan to trim the current $6 trillion bond purchase, and speculations are high that the central bank will taper the purchase to as low as 3 trillion yen. 

The twin uncertainty of the rate path and the government bond purchase plans continue to drag down the yen, and currency traders are preparing for the yen to drop as low as 170 before it finds its stable bottom. 

The Japanese yen rebounded to 158.64 against the U.S. dollar after the currency declined more than 2% in the previous week. 

Tech stocks were among the leading winners following the gains in the sector in New York, and artificial intelligence-linked stocks led the gainers in Tokyo. 

 

Japan Stock Movers 

The Nikkei 225 stock average gained 0.2% to 41,277.52, and the Topix index added 0.4% to 2,908.24. 

Softbank Group increased 0.2% to ¥11,410.0, and the venture capital fund led a $300 million investment round for the start-up Skild AI, which focuses on the core processes for generative AI. 

Financial stocks were among the leading gainers in Tokyo trading on Tuesday. 

Mitsubishi UFJ, Sumitomo Mitsui, and Mizhuo Financial advanced between 1% and 2%. 

Vehicle exporters were also in focus after the persistent weakness in the yen, which is expected to boost the profits of automakers. 

Honda Motor, Toyota Motor, and Nissan Motor gained between 1% and 2%. 

Taiyo Yuden jumped 9.4% to ¥5,037.0, and the electronics materials maker extended gains for the second week in a row amid expectations of higher sales in the current financial year. 

Murata Manufacturing, Kawasaki Heavy Industry (IHI), Alps Alpine, Fanuc, and TDK gained between 4% and 6%. 

 

Chinese Companies Line Up to Sell U.S. Dollar Bonds as Stock Indexes Search for Lower Levels 

Amid a growing cautious outlook for the second half, investors dialed back their economic growth outlook after a string of weak economic data releases on Monday. 

The Hang Seng index fell as much as 1.5%, and the CSI 300 index, tracking larger stocks on the mainland, edged slightly lower and extended losses for the second session in a row. 

Investors continued to lighten their holdings after China's second quarter economic growth, retail sales, and fixed-asset investment fell short of expectations. 

Policymakers in Beijing are struggling to develop a plan to rebuild consumer confidence and financial market-supportive measures amid falling consumer demand and a multi-year decline in broader market indexes. 

The Chinese government has limited financial flexibility as the country's debt hovers near 300% of GDP, and banks are struggling to account for losses linked to the residential property market. 

The Chinese Communist Party's third plenum is expected to release its broad outline of macroeconomic plans to bolster economic growth at the end of a four-day meeting on Thursday. 

However, investors have lowered their expectations of deep economic reform, including local and regional governments' huge losses that are not reflected in their annual finances. 

Meanwhile, private businesses continue to keep foreign earnings overseas amid widespread belief that the People's Bank of China is not in a position to sustain the current level of the yuan as economic growth continues to slow to 2% annual long-term growth. 

 

China Stock Movers 

The Hang Seng index decreased 1.4% to 17,770.46, and the CSI 300 index added 0.1% to 3,480.74. 

Tech stocks were among the leading decliners in Tuesday's trading. 

Alibaba Group declined 1.4% to HK $75.50, Baidu fell 3.6% to HK $90.60, Tencent Holdings decreased 2.2% to HK $381.80, and Meituan eased 1% to HK $118.0. 

Ping An Insurance Group declined 5.2% to HK $34.20, and the insurance giant announced its plan to sell $3.5 billion of convertible bonds. 

Several Chinese companies prepared to float U.S. dollar bonds amid growing expectations that U.S. interest rates are likely to ease in the coming months after the latest comments from Federal Reserve Chair Jerome Powell supported the possibility of a rate cut as early as September. 

China Cinda, SM Investments, and Mitsubishi HC Finance are looking to sell bonds denominated in the U.S. dollar as early as in the third quarter.