Broad U.S. Market Sell-Off Extends to Second Day After Rallying In Previous Six Weeks

Alexander Garcia
18 Jul, 2024
Miami

Bears held the grip on market sentiment for the second day in a row and tech stocks extended losses. 

Tech stocks failed to rebound after falling sharply in the previous session after two widely followed benchmark indexes created multiple record highs over the last seven weeks. 

The Nasdaq Composite fell 0.5% after the index dropped the most in the previous session since 2022, as investors weighed rising trade restrictions with China. 

Moreover, mega-cap stocks erased morning gains after falling in the previous session as investors increased positions in cyclical and small-cap stocks. 

The Russell 2000 index, which tracks small-cap companies, decreased 0.7%, and the benchmark index trimmed gains of 9% in the previous five sessions, as investors booked profits. 

The current market rotation is based on the assumption that the Federal Reserve is ready to lower rates as early as September, and lower rates are likely to benefit smaller and cyclical companies. 

The market rally broadened beyond mega-cap stocks in the last week of trading in the hopes that inflation's downward slide will continue and reach the Fed's target rate of 2%. 

Investors may be too optimistic about inflation, but despite the eleven rate hikes over 2022 and 2023, inflation has stayed above 3% for last several months. 

While the inflation rate has declined over the last two years, wages are still rising at a rate of more than 4% annually, inconsistent with the Fed's objective of bringing inflation down to 2%. 

Moreover, the Fed Chair Jerome Powell is signaling that interest rates could be lowered before inflation drops to 2%, as long as price increases are slowing, indicating that policymakers may talk tough but are more likely to abandon their long-held objective of weakening inflation to 2% or lower. 

The U.S. labor market may be softening, as the initial weekly jobless claims reached a new high since the first week in August 2023. 

Initial jobless claims increased by 10,000 to 243,000 in the week ending on July 13, and continuing claims advanced by 20,000 to 1,867 million, the U.S. Department of Labor reported Thursday.

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.5% to 5,562.15, and the Nasdaq Composite fell 0.6% to 17,900.04.

The yield on 2-year Treasury notes edged lower to 4.46%, 10-year Treasury notes decreased to 4.18%, and 30-year Treasury bonds edged higher to 4.30%.

WTI crude oil increased $0.55 to $83.41 a barrel, and natural gas prices edged up 9 cents to $2.12 a thermal unit.

Gold decreased by $1.74 to $2,480.01 an ounce, and silver was down 6 cents to $30.30. 

The dollar index, which weighs the U.S. currency against a basket of foreign currencies, edged lower to 103.91.

 

U.S. Stock Movers 

United Airlines Holdings increased 2% to $47.95, and the international carrier reported mixed quarterly results. 

Total revenue in the second quarter increased 5.7% to $47.95, net income jumped 23.1% to $1.3 billion from $1.1 billion, and diluted earnings per share advanced to $3.96 from $3.24 a year ago. 

Discover Financial Services rose 4.1% to $147.27, and the bank and payment services provider reported better-than-expected quarterly results. 

Revenue in the second quarter increased 17% to $4.5 billion from $3.9 billion, net income rose 70% to $1.5 billion from $895 million, and diluted earnings per share advanced to $6.06 from $3.54 a year ago. 

Total loans at the end of the quarter increased 8% to $127.6 billion from $117.9 billion, and the total net charge-off rate rose 161 basis points to 4.83% from 3.22% a year ago. 

Taiwan Semiconductor gained 2% to $174.95 after an advanced semiconductor maker reported better-than-expected quarterly results. 

Revenue in the second quarter increased 40% to NT $673.5 billion, net income jumped 36% to NT $247.8 billion, and diluted earnings per share rose 36.3% to NT $9.56. 

In U.S. dollars, second-quarter revenue increased 32.8% from a year ago to $20.82 billion, an increase of 10.3% from the previous quarter. 

Gross margin for the quarter was 53.2%, operating margin was 42.5%, and net profit margin was 36.8%. 

The company forecasted strong demand for its 3 nanometer production capacity from artificial intelligence-linked customers, and third quarter revenue is expected to range between $22.4 billion and $23.2 billion, and gross margin is expected to be between 53.5% and 55.5%. 

 

ECB Holds Rates Steady, EU New Car Registrations Rebounded In June 

European markets advanced, and investors awaited monetary policy decisions by the European Central Bank. 

The ECB held its three key lending rates steady after lowering rates for the first time in June since 2016. 

The central bank held its main refinancing rate at 4.25%, the deposit facility rate at 3.75%, and the marginal lending rate at 4.5%. 

Policymakers have been reluctant to provide a future rate path outlook amid wage pressure, as inflation remains above the 2% target rate set by the central bank. 

Bond traders are still looking for the ECB to lower rates by 25 basis points in September and October, but the rate outlook could change if energy prices rebound in the coming weeks. 

 

EU Passenger Car Registration Advanced 4.3% In June 

Passenger car registration in the European Union increased 4.3% from a year ago in June, driven by an increase in three of the four largest markets in the region. 

Passenger car registration in Italy increased 15.1%, in Germany it advanced 6.2%, in Spain it gained 2.2%, but declined in France by 4.8%. 

Battery electric vehicle registration declined 1% to 156,400, driving the total market share down to 14.4% from 15.1% a year ago. 

In the first half of 2024, new car registrations increased by 4.5% to nearly 5.7 million units; however, registration volumes remained 18% below pre-pandemic levels. 

In the first six months of the year, the bloc’s largest markets all showed positive but modest performance, with a 5.9% increase in Spain, 5.4% in Germany and Italy, and a 2.8% rise in France.

 

Europe Indexes and Yields

The DAX index decreased by 0.5% to 18,354.76; the CAC-40 index rose by 0.2% to 7,586.55; and the FTSE 100 index advanced by 0.2% to 8,204.89. 

The yield on 10-year German bonds edged higher to 2.44%, French bonds inched higher to 3.10%, the UK gilts inched higher to 4.08%, and Italian bonds decreased to 3.73%.

The euro edged lower to $1.09; the British pound inched higher to $1.30; and the U.S. dollar weakened to 88.40 Swiss cents.

Brent crude increased $0.37 to $85.042a barrel, and the Dutch TTF natural gas rose by €0.77 to €32.33 per MWh.

 

Europe Stock Movers

Frasers Group PLC increased 8.9% to 889.50 pence after the company's annual guidance for the current year surpassed market expectations. 

Publicis Groupe SA gained 4.5% to €101.60 after the company reported better-than-expected first-half results and raised its annual outlook for organic growth. 

Automakers advanced after new car registration in the European Union increased by 4.3% to 1.09 million units, reversing the 3% decline in May. 

BMW increased 1.8% to €91.32, Mercedes Benz advanced 2% to €64.61, Volkswagen jumped 1.2% to €107.75, and Renault gained 0.7% to €50.08. 

Nokia declined 4.7% to €3.41, and the Finnish telecom equipment maker reported a 32% decline in its second quarter operating income due to weak demand for its 5G wireless communication equipment. 

ABB Ltd. declined 6.2% to CHF 47.98 after the Swiss engineering company reported higher earnings, but orders fell in the second quarter. 

Net income increased by 21% to $1.1 billion from $906 million, and basic earnings per share rose to 59 cents from 49 cents a year ago. 

Revenue increased 1% to $8.24 billion from $8.16 billion, and orders dropped 3% to $8.44 billion from $8.67 billion in the previous year. 

For the fiscal year, ABB retained its comparable revenue growth estimate of 5% and operational EBIT margin of 18%. 

 

Nikkei 225 Drops 2% Amid Global Chip Stocks Selloff

The global tech stock selloff extended to Japan amid growing worries about rising trade tensions between the U.S. and China. 

The Nikkei 225 stock average plunged more than 2%, and the broader Topix index declined 1.5% amid reports that the U.S. is looking to expand trade restrictions and impose tougher sanctions on companies exporting critical semiconductor equipment to China. 

Moreover, Donald Trump, a U.S. presidential candidate and convicted felon, said that Taiwan should be paying for its defense as tensions simmer between China and Taiwan. 

 

Japan's Trade Surplus Expanded In June 

On the economic front, Japan's trade surplus unexpectedly rose in June after exports rose faster than imports. 

Japan's trade surplus expanded to 224.04 billion yen in June from 36.5 billion yen in the corresponding month a year ago, the Ministry of Finance reported Thursday. 

Japan recorded a trade surplus for the second month of this year, after exports rose 5.4% and imports advanced 3.2% from a year ago, respectively. 

Exports increased for the seventh month in a row due to strong demand from the U.S. and China, and the weaker yen restricted the growth in imports. 

For the first six months, Japan posited a trade gap of 3.23 trillion yen. 

 

Japan Stock Movers 

The Nikkei 225 stock average declined 2.3% to 40,153.18, and the Topix index dropped 1.5% to 2,872.61. 

Tokyo Electron dropped 8.8% to ¥30,470.0, Lasertec declined 6.3% to ¥29,740.0, Screen Holdings fell 8.6% to ¥13,560.0, and Disco Corp. plunged 8.8% to ¥55,260.0. 

Honda Motor Company declined 2.9% to ¥1,665.0, and the vehicle maker priced its secondary offering at a 3% discount to Wednesday's closing price. 

On the upside, Kansai Electric Power, Nichirei, Nitori Holdings, and Asahi Group added as much as 3%. 

 

Nikkei 225 Drops 2% Amid Global Chip Stocks Selloff, Japan's Trade Surplus Expanded in June 

The global tech stock selloff extended to Japan amid growing worries about rising trade tensions between the U.S. and China. 

The Nikkei 225 stock average plunged more than 2%, and the broader Topix index declined 1.5% amid reports that the U.S. is looking to expand trade restrictions and impose tougher sanctions on companies exporting critical semiconductor equipment to China. 

Moreover, Donald Trump, a U.S. presidential candidate and convicted felon, said that Taiwan should be paying for its defense as tensions simmer between China and Taiwan. 

On the economic front, Japan's trade surplus unexpectedly rose in June after exports rose faster than imports. 

Japan's trade surplus expanded to 224.04 billion yen in June from 36.5 billion yen in the corresponding month a year ago, the Ministry of Finance reported Thursday. 

Japan recorded a trade surplus for the second month of this year, after exports rose 5.4% and imports advanced 3.2% from a year ago, respectively. 

Exports increased for the seventh month in a row due to strong demand from the U.S. and China, and the weaker yen restricted the growth in imports. 

For the first six months, Japan posited a trade gap of 3.23 trillion yen. 

 

Japan Stock Movers 

The Nikkei 225 stock average declined 2.3% to 40,153.18, and the Topix index dropped 1.5% to 2,872.61. 

Tokyo Electron dropped 8.8% to ¥30,470.0, Lasertec declined 6.3% to ¥29,740.0, Screen Holdings fell 8.6% to ¥13,560.0, and Disco Corp. plunged 8.8% to ¥55,260.0. 

Honda Motor Company declined 2.9% to ¥1,665.0, and the vehicle maker priced its secondary offering at a 3% discount to Wednesday's closing price. 

On the upside, Kansai Electric Power, Nichirei, Nitori Holdings, and Asahi Group added as much as 3%. 

 

China Indexes Recover Morning Losses Ahead of Third Plenum Policy Announcements 

Stocks in Shanghai and Hong Kong traded volatile and rebounded from heavy losses in morning trading to close higher. 

The Hang Seng index and the CSI 300 index dropped at the open after semiconductor and tech stocks plunged following a report that the U.S. administration is looking to impose severe penalties on companies that share advanced semiconductor technology with China. 

However, market sentiment recovered in late afternoon, and benchmark indexes erased a loss of 2% in Hong Kong to close higher. 

Investors looked forward to possible market-supporting measures and economic reform announcements at the end of the Third Plenum later today. 

The 4-day close-door meeting of 205 members and 171 alternative members of Chinese Central Committee policymakers is a forum to discuss and set the nation's economic agenda for the next five years. 

Investors have lowered their expectations of deep economic reforms as the world's second-largest economy faces weakening domestic demand, rising geopolitical challenges, and steady capital outflow. 

 

China Stock Movers 

The Hang Seng index increased 0.5% to 17,830.35, and the CSI 300 index advanced 0.4% to 3,514.43. 

Semiconductor stocks were under pressure after Bloomberg News reported that the U.S. administration is preparing to place severe curbs on companies sharing manufacturing technology with China. 

Hua Hong Semiconductor increased 2.5% to HK $22.65, BYD Electronic fell 1.0% to HK $34.65, and SMIC increased 3.3% to HK $17.68. 

Nongfu Spring Company soared 7.4% to HK$35.65 after the Hong Kong Consumer Council reversed its earlier decision to label bottled water from the company as containing bromate. 

The HKCC apologized, said the brand was incorrectly categorized, and placed the company's product as a five-star product.