RECOVERY IN JEOPARDY ON RENEWED TRADE FEARS

 

Renewed trade fears are pushing U.S. stocks lower in afternoon action, after President Trump dimmed hopes for a near-term deal with China, while also indicating that upcoming trade talks in September may be cancelled. Additionally, earnings and economic data came in mixed, with Uber Technologies, Activision Blizzard and CBS all seeing pressure on the heels of their quarterly results, and July core wholesale price inflation coming in a bit cooler than expected. Treasury yields are dipping and the U.S. dollar is slightly lower, while gold and crude oil prices are gaining ground. Europe finished lower amid the trade worries and as Italian political uncertainty intensified.

 

At 12:51 p.m. ET, the Dow Jones Industrial Average is down 0.7%, the S&P 500 Index is falling 1.0%, and the Nasdaq Composite is dropping 1.3%. WTI crude oil is advancing $2.01 to $54.57 per barrel, Brent crude oil is increasing $1.25 at $58.63 per barrel, and wholesale gasoline is $0.03 higher at $1.68 per gallon. The Bloomberg gold spot price is $1.50 higher at $1,502.45 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is dipping 0.2% to 97.40.

 

Uber Technologies Inc. (UBER $40) reported a Q2 loss of $4.72 per share, versus the FactSet estimate of a shortfall of $2.03 per share, with revenues rising 14.0% year-over-year (y/y) to $3.2 billion, south of the projected $3.3 billion. The ride-hailing company's gross bookings came in slightly below the Street's expectations. Shares are falling as the company's revenue growth was the lowest in its history, fostering some heightened uncertainty regarding when it could become a profitable company.

   

Activision Blizzard Inc. (ATVI $48) posted Q2 earnings-per-share (EPS) of $0.43, or $0.38 ex-items, versus the forecasted $0.26, with revenues declining 12.9% y/y to $1.2 billion, roughly in line with estimates. The video game company issued Q3 guidance that missed estimates. Shares are lower.

  

CBS Corporation (CBS $49) announced Q2 EPS of $1.17, or $1.16 ex-items, compared to the forecasted $1.12, as revenues rose 10.0% y/y to $3.8 billion, above the expected $3.7 billion. CBS noted growth across all of its significant revenue streams. Shares are seeing pressure, with the markets appearing to be focused on the lack of news regarding its potential merger with Viacom Inc. (VIAB $30).

 

Symantec Corporation (SYMC $23) confirmed reports that it reached a deal to sell its enterprise business to Broadcom Inc. (AVGO $277) for roughly $10.7 billion in cash. The announcement accompanied SYMC's fiscal Q1 results that topped EPS and revenue estimates, while also reporting an increased share repurchase program, plans for a special dividend, and a restructuring initiative after the enterprise business sale closes. SYMC is giving back some of yesterday's rally that came on reports of the Broadcom deal, while AVGO is trading higher. 

  

Mattel Inc. (MAT $12) is falling decisively after the toy company terminated a note offering after it was made aware of an anonymous whistleblower letter. The company said the move provides it with an opportunity to investigate the matters set forth in the letter. 

 

Core wholesale price inflation a bit cooler than expected

 

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in July rose 0.2% month-over-month (m/m), in line with the Bloomberg forecast, and slightly above June's unrevised 0.1% rise. However, the core rate, which excludes food and energy, dipped 0.1% m/m, versus expectations calling for a 0.1% increase and compared to June's unadjusted 0.3% gain. Y/Y, the headline rate was 1.7% higher, matching projections and June's increase. The core PPI rose 2.1% y/y last month, south of estimates calling for it to match June's unrevised 2.3% gain. The m/m dip in core wholesale price inflation, which was the first since February 2017, likely came amid the recent rally in the U.S. dollar and as prices for truck transportation of freight declined.

 

Treasuries are inching higher, with the yield on the 2-year note  flat at 1.61%, while the yields on the 10-year note and the 30-year bond are dipping 1 basis point (bp) to 1.70% and 2.22%, respectively. The U.S. dollar is modestly lower, while gold has turned higher amid renewed trade tensions between the U.S. and China, exacerbated by comments from President Trump that dampened hopes of any near-term success in reading a deal, as well as floating the notion that talks scheduled between the two nations in September could be cancelled.

 

For a look at this environment, Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest video, How Are the Trade War and Fed's Rate Cut Affecting Markets?. Liz Ann notes that we continue to think trade is a very important factor and is the most important needle-mover in terms of where we are in the economic trajectory. She adds that if it gets worse from here, we think recession risks start to move quite high. In the meantime, Liz Ann adds that we think investors ought to stay fairly defensive, fairly cautious. Use diversification. Use rebalancing. Don't get, so called "out over your skis," in terms of equity allocation. She concludes that this is not a time to take excess risk as we think we're in for a continued bumpy ride in the markets.

 

Europe lower amid trade worries, data and Italian political tensions 

 

European equities were solidly lower after comments from President Trump that indicated that trade talks between the U.S. and China may be cancelled, ramping up already-high trade anxiety, while the markets also sifted through some economic data and Italian political uncertainty continued to intensify. Italian bond yields surged and the nation's banking sector fell after Deputy Prime Minister and leader of the country's ruling Lega party, Matteo Salvini, declared the coalition arrangement unworkable and called for new general elections. In economic news, German exports unexpectedly dipped, while industrial/manufacturing production figures out of France and the U.K. fell. Moreover, U.K. Q2 GDP growth unexpectedly contracted quarter-over-quarter. The euro gained ground on the U.S. dollar and the British pound fell, while bond yields in the region were mixed. As U.S.-China trade tensions have unnerved the markets and fostered volatility as of late, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Tariffs: Manufacturing A Recession, discussing that additional trade tariffs may prolong and deepen the global downturn in manufacturing, with negative consequences for stocks. Jeff concludes that by staying as far as possible from the successive waves of U.S.-China trade barriers might offer a relative growth advantage for companies based in Europe and Japan.

 

The U.K. FTSE 100 Index was down 0.4%, Germany's DAX Index and Spain's IBEX 35 Index fell 1.3%, France's CAC-40 Index decreased 1.1%, and Italy's FTSE MIB Index tumbled 2.5%, while Switzerland's Swiss Market Index was little changed.

 

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