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Beyond the Numbers

Concerns About Coronavirus, U.S.-China Tensions May Weigh On Wall Street
7/22/2020 9:05 AM

The major U.S. index futures are pointing to a modestly lower open on Wednesday following the mixed performance seen in the previous session.

Lingering concerns about the economic impact of the recent surge in coronavirus cases may contribute to initial weakness on Wall Street.

President Donald Trump has largely remained optimistic about containing the coronavirus but warned on Tuesday that the pandemic “will probably, unfortunately, get worse before it gets better.”

With new cases spiking, the U.S. government placed an initial order for 100 million doses of the COVID-19 vaccine candidate jointly developed by Pfizer (PFE) and BioNTech (BNTX) for $1.95 billion and can acquire up to 500 million additional doses.

Worries about rising tensions between the U.S. and China may also generate some selling pressure after the U.S. asked Beijing to close its diplomatic consulate in Houston within the next 72 hours.

Chinese foreign ministry spokesperson Wang Wenbin condemned the action and warned of retaliation if the U.S. does not reverse its decision.

After ending Monday’s session mostly higher, stocks turned in a mixed performance during trading on Tuesday. The S&P 500 reached its best closing level in five months, while the tech-heavy Nasdaq gave back ground after spiking to a record closing high on Monday.

The major averages finished the day on opposite sides of the unchanged line. While the Nasdaq slid 86.73 points or 0.8 percent to 10,680.36, the Dow climbed 159.53 points or 0.6 percent to 26,840.40 and the S&P 500 rose 5.46 points or 0.2 percent to 3,257.30.

The advance by the Dow was partly due to strong gains by energy giants Chevron (CVX) and Exxon Mobil (XOM), which surged up by 7.1 percent and 5.1 percent, respectively.

The gains reflected strength throughout the energy sector, as the price of crude oil for August delivery spiked $1.15 to a four-month high of $41.96 a barrel.

Dow component Coca-Cola (KO) also posted a notable gain after the beverage giant reported better than expected second quarter results.

Meanwhile, shares of IBM (IBM) edged lower even though tech giant reported second quarter results that exceeded analyst estimates on both the top and bottom lines.

Reflecting the strength in the energy sector, the Philadelphia Oil Service Index soared by 6.9 percent, the NYSE Arca Oil Index jumped by 5.9 percent and the NYSE Arca Natural Gas Index shot up by 4.7 percent.

Banking stocks also showed a substantial move to the upside on the day, driving the KBW Bank Index up by 3.9 percent. Tobacco, airline and brokerage stocks also saw considerable strength.

On the other hand, biotechnology stocks fell sharply, contributing to the pullback by the Nasdaq. The NYSE Arca Biotechnology Index plunged by 2.6 percent after ending the previous session at a record closing high.

Notable weakness was also visible among software stocks, as reflected by the 1.3 percent drop by the Dow Jones U.S. Software Index.

Traders were also reacting to news that European Union leaders agreed on a package of measures to tackle the exceptional nature of the economic and social situation posed by the coronavirus pandemic.

After four days of talks in Brussels, EU leaders agreed to the package worth 750 billion euros. Accordingly, the bloc will jointly issue debt that will be provided to member nations hit hardest by Covid-19.

Out of the 750 billion euro recovery plan, 390 billion euros will be in the form of grants and 360 billion euros of low interest rate loans. Now, the deal needs to be approved by the parliaments of the 27 member states.

Commodity, Currency Markets

Crude oil futures are sliding $0.64 to $41.28 a barrel after jumping $1 to $41.92 a barrel on Tuesday. Meanwhile, an ounce of gold is trading at $1.855.50, up $11.60 compared to the previous session’s close of $1,843.90. On Tuesday, gold spiked $26.50.

On the currency front, the U.S. dollar is trading at 107.06 yen compared to the 106.80 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is trading at $1.1597 compared to yesterday’s $1.1527.

Asia

Asian shares ended mostly lower on Wednesday after U.S. President Donald Trump warned the U.S. coronavirus crisis will probably worsen before improving.

However, the downside was capped by vaccine hopes and an agreement among European Union leaders on a 750 billion euro ($859 billion) fund to prop up their coronavirus-hit economies.

Chinses shares extended gains for the fourth day amid bets that Beijing will push forward with reforms in the tech sector. The benchmark Shanghai Composite Index rose 12.27 points, or 0.4 percent, to 3,333.16.

Hong Kong's Hang Seng Index tumbled 577.72 points, or 2.3 percent, to 25,057.94 as Covid-19 cases topped daily record.

Japanese shares ended lower as traders adopted a cautious stance ahead of a four-day weekend. The Nikkei 225 Index dropped 132.61 points, or 0.6 percent, to 22,751.61, while the broader Topix closed 0.6 percent lower at 1,572.96.

Railway shares continued to underperform amid rising Covid-19 cases in the country. Six hundred and thirty-two cases were reported on Tuesday.

East Japan Railway tumbled 2.9 percent to hit a seven-year low, while West Japan Railway fell 1.7 percent to its lowest level since 2014. Drugmaker Daiichi Sankyo slumped 4.6 percent.

In economic news, the manufacturing sector in Japan continued to contract in July, albeit at a slightly slower pace, the latest survey from Jibun Bank revealed with a manufacturing PMI score of 42.6, up from 40.1 in June.

Individually, production and new orders continued to fall at substantial rates, albeit slower than in June. The rate of decline in employment accelerated further and was marked overall.

The data also showed that the services PMI ticked up to 45.2 from 45.0 last month, while the composite index improved to 43.9 from 40.8.

Australian markets fell sharply due to virus worries. The benchmark S&P/ASX 200 Index gave up 81.20 points, or 1.3 percent, to finish at 6,075.10, while the broader All Ordinaries Index ended down 76.20 points, or 1.2 percent, at 6,192.60.

Tech stocks fell, with buy-now-pay-later firm Afterpay tumbling 3.4 percent after a two-day rally. WiseTech Global lost 3.9 percent.

Mining heavyweight BHP declined 3.4 percent after it warned of risks from the coronavirus in its quarterly production update. Rio Tinto dropped 1.5 percent and smaller rival Fortescue Metals Group shed 1.9 percent.

Meanwhile, gold miners Evolution Mining, Newcrest and Regis Resources rose 1-2 percent after bullion prices settled at a nearly nine-year high on Tuesday, propelled by a softer U.S. dollar and expectations of more stimulus to resuscitate pandemic-hit economies.

Resolute Mining jumped 12.9 percent after confirming its full-year guidance. Woodside Petroleum and Santos rose 1-2 percent after crude prices hit four-month highs on Tuesday. Beach Energy surged 4.7 percent despite the company reporting a decrease in quarterly production volume.

QBE Insurance Group advanced 1.7 percent even though the insurance giant warned of a statutory loss for the first half. Rare earths miner Lynas Corp. declined 2.4 percent after its output nearly halved in the fourth quarter.

Australia's unemployment rate is set to rise further, even with the recovery underway, Reserve Bank of Australia Governor Philip Lowe said Tuesday.

This is because many of the people who lost their jobs over recent times have been classified as not in the labor force and so are not counted as unemployed, he noted.

On the data front, Australian retail turnover advanced 2.4 percent on a monthly basis in June but slower than the 16.9 percent increase in May, a government report showed. Year-on-year, turnover grew 8.2 percent.

Seoul stocks ended largely unchanged on concerns over an increasing number of coronavirus infections globally. The benchmark Kospi ended little changed with a negative bias at 2,228.66 after climbing 1.4 percent the previous day, helped by positive news about vaccine trials and an EU stimulus deal.

Samsung Electronics and SK Hynix both fell over 1 percent, while automaker Hyundai Motor lost 2.5 percent and its affiliate Kia Motors declined 2.5 percent.

Power plant builder Doosan Heavy Industries & Construction soared 20 percent amid expectations that it may benefit from the government's Green New Deal initiative.

Steelmaker POSCO rallied 3.1 percent despite reporting an operating loss in the second quarter for the first time in two decades.

Europe

European stocks have fallen from a four-month high on Wednesday as the initial euphoria over an agreement on EU stimulus package fades and the focus shifts back to surging coronavirus cases around the world.

As the U.S. death toll from the coronavirus pandemic topped 142,000, President Donald Trump said the pandemic “will probably, unfortunately, get worse before it gets better.” Brexit deal talks and rising U.S.-China tensions also remain on investors' radar.

The British pound has weakened after reports suggested the U.K. is close to abandoning hope of reaching a Brexit trade deal with the EU amid deadlock on key issue.

The United States has asked Beijing to close its diplomatic consulate in Houston within the next 72 hours, the Chinese foreign ministry said, dealing another blow to the rapidly deteriorating relations between the two countries.

While the French CAC 40 Index has slumped by 1.1 percent, the U.K.’s FTSE 100 Index is down by 0.9 percent and the German DAX Index is down by 0.5 percent.

Shares of Iberdrola S.A. have dropped in Spain after the utility reported that its second-quarter net profit declined 13.6 percent from last year as a result of the lockdown following COVID-19 pandemic.

Dutch supermarkets and eCommerce company Ahold Delhaize N.V. has also declined. The company said that its U.S. brand Stop & Shop reached a tentative agreement to terminate its participation in the United Food & Commercial Workers International Union (UFCW) - Industry Pension Fund.

French car parts maker Valeo SA has moved sharply lower after it swung to a 1.2 billion euro loss in the first half of 2020.

Meanwhile, Swiss engineering firm ABB has moved to the upside. The company posted better than expected results for the April to June period and said it expects improvement in order decline in the coming months.

Software AG shares have also jumped. The German enterprise software company reconfirmed its current 2020 guidance as a whole after reporting a decline in second quarter profit.

Kingfisher shares have soared in London after the home improvement retailer forecast first-half underlying profit ahead of last year.

Computacenter has also surged. The IT services firm said its adjusted profit before tax in the first half turned out to be "substantially ahead" of the same period last year.

U.S. Economic Reports

The National Association of Realtors is due to release its report on existing home sales in the month of June at 10 am ET. Existing home sales are expected to spike by 24.5 percent in June after plunging by 9.7 percent in May.

At 10:30 am ET, the Energy Information Administration is scheduled to release its report on oil inventories in the week ended July 17th.

Crude oil inventories are expected to decrease by about 2.0 million barrels after slumping by 7.5 million barrels in the previous week.

The Treasury Department is due to announce the results of its auction of $17 billion worth of twenty-year bonds at 1 pm ET.

Stocks In Focus

Shares of HCA Healthcare (HCA) are moving sharply higher in pre-market trading after the hospital operator reported second quarter earnings that came in well above analyst estimates.

Consumer electronics retailer Best Buy (BBY) may also see initial strength after reporting a 15 percent jump in sales since the company began reopening stores in mid-June.

On the other hand, shares of Capital One (COF) are likely to move to the downside after the bank reported a second quarter loss on weaker than expected revenues.

Snapchat parent Snap Inc. (SNAP) may also come under pressure after reporting a second quarter loss that matched expectations but user growth came in below estimates.
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