Futures Slide As Ugly Mag 7, European Earnings Sour Trader Mood

Stock futures and global markets slumped, with tech dragging the indices lower, after disappointing results from Tesla and Alphabet were followed by lackluster reports from LVMH and Deutsche Bank in Europe. The first Mag7 earnings results were - as we warned in "Now Comes The Hard Part: AI Stocks Face Brutal Q2 Earnings Day Of Reckoning" - a flashing red  warning with TSLA tumbling 7%, GOOG down -3%, and the rest of the Mag7 all lower. The yield curve is steepening with 2Y seeing follow-thru buying following yesterday’s strong auction. USD is stronger and commodities are weaker excluding energy. Today’s macro data focus is on Flash PMIs, New Home Sales/mortgage applications, and Inventories. 

In premarket trading, it was all about the carnage in the first Mag7 reporters: Tesla shares plunged 8% in premarket trading after the company reported profit which missed estimates and postponed the unveiling of its highly anticipated autonomous robotaxis. Alphabet shares drop 3.4% as analysts highlight weakness in YouTube and higher capex spending. However, Google’s parent company reported second-quarter results that beat expectations on other key metrics. Here are some other notable US premarket movers:

• Enphase Energy shares jump 6.8% after the solar-equipment manufacturer reported second-quarter gross margin that was higher than estimates. Truist Securities said the third-quarter guidance, while below consensus estimates, should give investors confidence.
• Geron shares fall 6.7% after the biopharmaceutical company said Anil Kapur, its chief commercial officer, will depart on Aug. 31. Analysts note that the optics are not great as the reorganization comes shortly after Geron launched its highly-anticipated blood disorder drug, Rytelo.
• Seagate shares gain 4.9% after it forecast adjusted earnings per share for the first quarter that beat the average analyst estimate. The company also reported better-than-expected fourth-quarter adjusted EPS and revenue.
• Tesla shares fall 7.8% after the world’s most valuable automaker reported its fourth straight quarter of disappointing profits. Analysts noted that the stock might be pressured by the unexpectedly weak automotive gross margins in the second quarter.
• Texas Instruments shares rose 2.8% after the chipmaker reported its second-quarter results and gave a forecast that was largely in line with expectations, reassuring investors that a revival is underway in key markets.
• Visa shares fall 3.2% after the company reported third-quarter net revenue and payment volume that fell short of the average Wall Street estimate.

Almost a month after our warning that this earnings season will be ugly (see here), analysts are poring over this week’s raft of earnings for signs that the tech-driven rally of the first half of the year has longer to run.. and so far they aren't finding them. The market is facing pressure into the summer months, with volatility also likely to be heightened by uncertainty as the US presidential race gathers pace. Hopes for the so-called Magnificent Seven are lofty. Analysts project profits at these companies to have jumped 30% in the second quarter, compared with a 10% increase for the S&P 500 as a whole, according to data compiled by Bloomberg Intelligence.

“What we’re seeing during this earnings season is the growing gap between the rather optimistic profit consensus from analysts and slowing economic growth,” said Benoit Peloille, chief investment officer at Natixis Wealth Management. “With unemployment now on the rise, earnings disappointment is to be expected and that’s what we’re seeing this season. This is true for the US and to some extent for Europe.”

So far, about a fifth of S&P 500 companies have reported results. Analyst estimates slid ahead of the season as they usually do, but market strategists including Morgan Stanley’s Michael Wilson and Barclays’ Emmanuel Cau have warned that the downgrades have been milder on this occasion, setting the bar for positive surprises higher. Investors appear particularly worried about sales, with less than half of companies beating expectations.

“Mixed earnings, alongside softening activity data and high political uncertainty keep markets on edge,” said Barclays’ Cau.

Major European markets are all lower with most down at least 1 sigma: Spain is outperforming, and France is lagging. Eurozone PMIs were weaker than expected, missing Mfg, Services and Composite as well as printing lower MoM. The Stoxx 600 is down almost 1% led lower by consumer product names and banks: Deutsche Bank dropped on its first quarterly loss in four years and scrapped plans for a buyback Germany’s largest lender said trading slowed and that it would most likely refrain from conducting a second share buyback this year, after a €1.3 billion ($1.4 billion) litigation provision tied to its Postbank retail unit. LVMH tumbled 6.5% to a six month low after sales in China plummeted during the quarter, adding evidence that an economic slowdown is hurting European companies and that even the strongest brands are succumbing to a slowdown in demand for high-end items. Analysts flagged a hit from currency movements as well as weakness in China. Here are the other notable European movers:

• Nexans shares jump as much as 9.6% to their highest intraday level since July 2007, after the French cable manufacturer boosted its full-year adjusted Ebitda forecast above consensus expectations.
• Reckitt Benckiser shares rise as much as 5% with investors encouraged by the decision to sell non-core homecare brands and review options for its baby formula arm.
• Dassault Aviation shares gain as much as 11% after the French airplane maker reported 1H earnings that impressed on cash flows, reassuring investors after a selloff in recent months.
• EasyJet shares rise as much as 9.7% after the company reported in-line third-quarter results, quelling concerns about summer demand after Ryanair’s reduced fare outlook.
• Sodexo shares climb as much as 5.1% after the firm announced the sale of subsidiary Sofinsod, which analysts note simplifies the ownership structure and monetizes an illiquid asset.
• Aston Martin shares rise as much as 12% after the carmaker reported revenue for the second quarter that beat the average analyst estimate.
• LVMH shares drop as much as 5.2% to a six-month low after a disappointing set of results signals that even the strongest brands are succumbing to a slowdown in demand for high-end items.
• Bank stocks sink to be among the worst-performing sectors, weighed down by Deutsche Bank which slumped after posting a loss and saying it will most likely skip a second share buyback this year.
• Iveco shares drop as much as 12.5%, the biggest decline since January 2022, after the Italian truckmaker reported a free cash flow which “disappointed again,” according to Morgan Stanley.
• ASMI shares fall as much as 4.5%, giving back Tuesday’s pre-earnings gains. The chip equipment maker reported lower-than-expected profitability, likely due to weaker sales from China.
• Metso shares slide as much as 7.3% after the Finnish industrial machine group presented disappointing second-quarter earnings, affirming faltering investor confidence.
• Temenos shares decline as much as 5.9% after the financial software firm cut its sales growth guidance for the full-year, albeit with other targets maintained for now.

In FX, the dollar is steady. The yen is the best performer among G-10 FX, extending gains versus the dollar after a Reuters report said the BOJ will weigh raising interest rates at its meeting next week. The euro slipped as European data showed private-sector activity barely grew.

In rates, treasuries hold small gains in early US trading Wednesday, led by short maturities following record foreign demand for Tuesday’s 2-year note auction; 10Y yields edged lower to 4.23% as investors awaited US debt auctions and manufacturing PMI data, while yields in the 2-year sector are more than 2bp lower on the day near session lows, further steepening the yield curve. With 10- to 30-year yields lower by only ~1bp, key curve spreads are approaching year’s steepest (or least inverted) levels; new 2-year note’s yield is less than 20bp higher than 10-year note’s, the smallest margin since January.  The supply cycle continues with $70b 5-year note sale at 1 p.m. New York time. German and French 10-year government bonds are little changed and the euro is slightly lower after soft PMI data from the bloc, most notably in manufacturing. Gilts are also steady after the UK figures were more encouraging while the pound has pared an earlier fall.

In commodities, oil prices advance, with WTI rising 0.9% to ~$77.70 a barrel. Spot gold is steady around $2,413/oz.

Today's US economic data calendar includes June preliminary wholesale inventories and June advance goods trade balance (8:30am), July preliminary S&P Global US manufacturing and services PMIs (9:45am) and June new home sales (10am). Fed Governor Bowman and Dallas Fed President Logan are slated to give opening remarks at an event on Texas community partnerships at 4:05pm, the only scheduled appearances until after the next FOMC meeting ends July 31

Market Snapshot

• S&P 500 futures down 0.8% to 5,554.00
• STOXX Europe 600 down 0.8% to 511.09
• MXAP down 0.5% to 181.88
• MXAPJ down 0.4% to 564.38
• Nikkei down 1.1% to 39,154.85
• Topix down 1.4% to 2,793.12
• Hang Seng Index down 0.9% to 17,311.05
• Shanghai Composite down 0.5% to 2,901.95
• Sensex down 0.7% to 79,843.44
• Australia S&P/ASX 200 little changed at 7,963.72
• Kospi down 0.6% to 2,758.71
• German 10Y yield -2bps at 2.42%
• Euro down 0.2% to $1.0833
• Brent Futures up 0.7% to $81.57/bbl
• Gold spot up 0.1% to $2,412.56
• US Dollar Index little changed at 104.52

Top Overnight News

• LVMH led a sell-off in global luxury stocks on Wednesday after the industry bellwether reported slower than expected sales from shoppers reining in spending on champagne and handbags. Other luxury stocks also declined as investors worried about demand from Chinese consumers and the outlook for a sector that is slowing down after several years of record growth. FT
• Deutsche Bank stock dropped after the lender posted its first quarterly loss in four years because of a legal provision and said it probably won’t buy back shares this year. Revenue from fixed-income and currencies fell about 3%, trailing the average 5% gain on Wall Street. IB income rose about 10%. BBG
• Europe’s flash PMIs fall short of expectations in Jul, with manufacturing coming in at 45.6 (down from 45.8 in June and below the Street’s 46.1) while services dips to 51.9 (down from 52.8 in June and below the Street’s 52.9), and inflation was mixed (with higher input costs but cooler selling prices). S&P
• Donald Trump filed a legal complaint against the transfer of Joe Biden’s $96 million campaign war chest to Kamala Harris. Elon Musk said he’s donating to a pro-Trump super PAC but at significantly lower levels than the $45 million per month previously reported. BBG
• Blackstone is doubling down on its international credit business and will target growth in a broader range of debt including local-currency investments. BBG
• US crude inventories fell by 3.86 million barrels last week, with a drop also seen at Cushing, the API is said to have reported. The fourth week of declines would be the longest stretch since September if confirmed by the EIA today. BBG
• CrowdStrike blamed a bug in a safety mechanism for allowing flawed data to go out to customers in a botched update, causing last week’s meltdown. BBG
• The Federal Trade Commission is seeking information about how artificial intelligence and other technological tools may allow companies to vary prices using data they collect about individual consumers’ finances and shopping habits. WSJ

Earnings

• Alphabet Inc (GOOG) Q2 2024 (USD): EPS 1.89 (exp. 1.84), Revenue 84.742bln (exp. 84.18bln). Revenue breakdown. Google Advertising rev 64.6bln (exp. 64.4bln).Google Cloud Revenue 10.35bln (exp. 10.158bln). Google Search & Other Revenue 48.51bln (exp. 47.65bln). Shares fell 2.2% after hours
• Tesla Inc (TSLA) Q2 2024 (USD): Adj. EPS 0.52 (exp. 0.62), Revenue 25.5bln (exp. 24.77bln). Co. said the focus remains on company-wide cost reduction. Shares fell 7.8% after hours.
• Visa Inc (V) Q3 2024 (USD): Adj. EPS 2.51 (exp. 2.43), Revenue 8.9bln (exp. 8.89bln). Shares fell 3.3% after hours.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly rangebound with a negative bias seen following the lacklustre handover from Wall Street after risk appetite was dampened by underwhelming earnings results. ASX 200 was indecisive and briefly clawed back early losses with sentiment clouded by mixed Flash PMI data. Nikkei 225 retreated at the open amid headwinds from a firmer currency, while PMI data was also varied. Hang Seng and Shanghai Comp. were subdued with early pressure from demand concerns after China's slowdown weighed on luxury spending which was evident in the 14% decline in LVMH sales in the region, while Chow Tai Fook Jewellery was among the worst hit in Hong Kong after its quarterly group retail sales fell 20% Y/Y. However, the mainland bourse managed to recover losses to return to relatively flat territory after rebounding from a brief dip beneath the 2,900 level.

Top Asian News

• BoJ to weigh rate hike next week and have a detailed plan to halve bond buying in the coming years, according to Reuters citing sources. BoJ to taper bond buying gradually at pace near market consensus . July rate hike decision is a close call and consumption outlook is key; source describes it as a judgement call in terms of acting now or later in the year. BoJ sees no compelling reason to rush, given price rises remain moderate and inflation expectations are stable. Source adds the BoJ is likely to taper its bond purchases gradually and in several stages, at a pace roughly in-line with the markets dominate view, to avoid any yield spike.

European bourses, Stoxx 600 (-0.9%) began the session on a weaker footing, and sentiment has continued to dwindle as the morning progressed; as it stands indices resides at lows. Today’s European PMI releases have been poor, with Germany’s composite surprisingly falling into contractionary territory, whilst the EZ managed to stay in expansionary territory and noted that its GDP Nowcast still pointed towards growth in Q3. European sectors hold a strong negative bias, with only Travel & Leisure remaining afloat, which is assisted by post-earning gains in easyJet (+5.7%). Consumer Products is the clear underperformer, after LVMH (-4.7%) results, which has also weighed on peers. Banks are also towards the foot of the pile, given the significant losses in Deutsche Bank (-6.7%).

Top European News

• Deutsche Bank Scraps Buyback After First Loss in Four Years
• Temenos Drops on Guidance Cut, Hindenburg Report Hurts Sales
• Reckitt to Sell Some Homecare Brands, Review Formula Unit
• Informa to Buy Cannes Lions Owner Ascential for £1.2 Billion
• Atos Chair Mustier Becomes CEO as Restructuring Moves Ahead
• DWS Promises Better 2024 Despite Quarterly Client Outflows
• DSV Is Ready For Big M&A, CEO Says Amid DB Schenker Reports

FX

• DXY is steady around the 104.50 mark with the USD showing mixed performance vs. peers. The USD is softer against havens such as CHF and JPY whilst faring better against risk-sensitive currencies. 104.55 marks today's peak for the DXY with not much in the way of resistance until the 100DMA at 104.82.
• EUR is hampered by a soft set of PMI metrics with the German report a notable lowlight for the region; the release suggests a 0.4% Q/Q contraction for German GDP in Q3. As such, EUR/USD's journey to the low 1.08's has continued, currently around 1.0830.
• GBP is a touch softer vs. the USD with Cable extending its move below the 1.29 mark. GBP/USD saw some slight reprieve from mixed PMI metrics with the low for the pair currently at 1.2878.
• JPY is continuing to edge out gains vs. the USD. Price action has followed the recent broader trend but is also likely being aided by the current risk environment. USD/JPY has taken out support at the 155 level, which some desks had seen as a key test for the pair,slipping to a 154.31 base on a recent Reuters source piece.
• Antipodeans are both the G10 underperformers. AUD is extending its losing streak vs. the USD to an 8th consecutive session with the pair now below the 0.66 level for the first time since 17th June.
• CAD is steady vs. the USD in the run up to today's BoC policy announcement. Consensus is for a cut, however, analysts are not unanimous in this view and therefore there could be some choppiness on the decision itself.
• PBoC set USD/CNY mid-point at 7.1358 exp. 7.2795 (prev. 7.1334).

Fixed Income

• Bunds are firmer after a dismal German PMI series and, by extension, a poor EZ report. The French release earlier sparked some modest pressure in Bunds, but could ultimately be caveated by the impending Olympics. Bunds to a 132.66 new WTD peak but stalling before last week’s 132.77 best. Bunds were heading lower into the German auction, which then fuelled further weakness
• USTs are moving in-line with EGBs thus far with macro newsflow, but docket does pick up later on with the region's own PMIs and a 5yr auction both scheduled. Currently, at a 110-31 peak with yesterday’s best just above at 111-00.
• Gilts were bid their own PMIs, which were mixed, but had an overall hawkish skew, and as such, fell from 98.13 to a 97.94 base, before paring back towards the 98.00 mark, following a strong 2054 auction.
• UK sells GBP 2.25bln 4.375% 2054 Gilt: b/c 3.35x, average yield 4.636%, tail 0.2bps

Commodities

• Crude is trading with modest gains thus far following another slump yesterday. Weak Chinese demand is the factor cited for the recent persisting weakness in crude. Brent counterpart resides in a 81.12-67/bbl range.
• Overally mixed and contained trade across precious metals amid a lack of pertinent catalysts to drive price action overnight, whilst the morning saw the complex unreactive to Flash PMI data from Europe. Spot gold trades in a USD 2,419.26-2,405.01/oz parameter after topping resistance around USD 2,412/oz.
• Mixed trade for base metals with the complex awaiting the next catalysts after being unfazed by European Flash PMIs.
• US Private Inventory Data (bbls): Crude -3.9mln (exp. -1.6mln), Distillate -1.5mln (exp. +0.2mln), Gasoline -2.8mln (exp. -0.4mln), Cushing -1.6mln.

Geopolitics: Middle East

• IDF launched a new incursion into West Bank’s Tulkarem, according to a source cited by Times of Israel.
• Artillery shelling and Israeli tank fire was reported on east of Khan Younis, according to Al Jazeera.
• Islamic Resistance in Iraq said it conducted a drone attack on a vital target in the north of Eilat, according to Al Jazeera.

Geopolitics: Other

• French prosecutors said a Russian was arrested over 'destabilisation' plot during Paris Olympics, according to AFP.
• Japanese Chief Cabinet Secretary Hayashi said Russia's decision to restrict 13 Japanese individuals' entry including Toyota Motor's Chairman is "totally unacceptable" and they filed a complaint against Russia over their decision to restrict entry.

US Event Calendar

• 07:00: July MBA Mortgage Applications -2.2%, prior 3.9%
• 08:30: June Wholesale Inventories MoM, est. 0.5%, prior 0.6%
  • June Retail Inventories MoM, est. 0.5%, prior 0.7%
• 08:30: June Advance Goods Trade Balance, est. -$98.7b, prior -$100.6b, revised -$99.4b
• 09:45: July S&P Global US Manufacturing PM, est. 51.6, prior 51.6
  • July S&P Global US Composite PMI, est. 54.2, prior 54.8
  • July S&P Global US Services PMI, est. 54.9, prior 55.3
• 10:00: June New Home Sales, est. 640,000, prior 619,000

DB's Jim Reid concludes the overnight wrap

The Olympics unofficially starts today in Paris ahead of Friday's opening ceremony. The five of us are going to Paris for a long weekend in two weeks' time to a) watch the synchronised swimming finals (artistic swimming as it's now called), and b) go to EuroDisney. I've refused to waste good money on tickets for the twins for the artistic swimming so we'll be roaming the streets in Paris while my wife and Maisie go. In addition I'll be also trying to find some urgent client meetings to do in Paris which means I can avoid two days at EuroDisney. Help!

The market’s torch has shone slightly less brightly in the last 12 hours with the S&P 500 (-0.16%) losing some late traction after Monday’s rebound with S&P (-0.65%) and Nasdaq (-0.95%) futures notably lower this morning after a soft start to Mag-7 earnings after the bell. At the close last night the S&P 500 declined for the fourth time in five sessions, the first such occurrence since April, and having seen its biggest 3-day fall since October at the back end of last week. These choppy markets come as the focus is now squarely on earnings season. Alphabet and Tesla last night will be followed by Apple, Meta, Microsoft and Amazon next week but with Nvidia the laggard on August 28th.

Those tech earnings started on an underwhelming note last night. Alphabet did post a modest revenue and earnings beat, boosted by cloud computing and advertising growth, but its shares slid -2.2% in post-market trading after the management call alluded to upcoming expense pressures. Meanwhile, Tesla fell by -7.7% after-hours as it missed earnings expectations for a fourth consecutive quarter and delayed its Robotaxi event until October. Both Alphabet and Tesla had earlier fallen by about 1% in the final 30 minutes of regular trading (they were +0.07% and -2.04% on the day respectively), contributing to a weak equity close.

Earlier yesterday, we had plenty of other results that dictated the market narrative. For instance, Spotify (+11.96%) had its best performance since January 2023 after announcing a record profit, along with growth in paid subscribers of 12% from the previous year. Other outperformers included General Electric (+5.68%), which had its best day since April after raising its guidance, whilst SAP (+7.15%) had its best day since January after their own results. That said, it wasn’t all good news, as UPS (-12.05%) saw the biggest daily decline in its share price since it first went public in 1999, after its earnings missed estimates.

Amidst all those results, equity indices had a mixed day across both sides of the Atlantic. In the US, both the Magnificent 7 (-0.05%) and the NASDAQ (-0.06%) saw marginal losses, but small caps had an excellent day, with the Russell 2000 up +1.02% and with the more cyclical sectors leading the upside. Over in Europe the STOXX 600 was marginally higher (+0.13%) amid strong gains for Germany’s DAX (+0.82%), itself helped along by the SAP advance mentioned above. But there were losses for the UK’s FTSE 100 (-0.38%) and France’s CAC 40 (-0.31%).

Meanwhile for sovereign bonds, there were gains on both sides of the Atlantic. In part, that came amidst a fresh decline in oil prices, which added to hopes that inflationary pressures were waning. Indeed, WTI crude was down -3.53% yesterday to a one-month low of $76.96/bbl. Alongside that, there was some weaker second-tier data out of the US, which cemented investors’ confidence that the Fed were on course to cut rates at their September meeting. The data showed existing home sales were down -5.4% in June (vs. -3.2% expected), taking them down to an annualised rate of just 3.89m, their lowest in six months. Separately, the Richmond Fed’s manufacturing index was down to -17 in July (vs. -7 expected), which is its lowest level since May 2020 during the Covid lockdowns.

With growing conviction about future rate cuts, that helped push yields on 2yr Treasuries down -2.6bps to 4.49%, whilst those on 10yr Treasuries were down - 0.2bps to 4.25%. Front-end outperformance was aided by a very strong 2yr auction which saw $69bn of bonds issued 2.3bps below the pre-sale yield as primary dealer take up fell to its lowest since the start of the data in 2003.

The bond gains were larger in Europe, but there was also a fairly sharp widening in sovereign bond spreads there, with those on 10yr bunds down -5.7bps, whereas those on 10yr OATs (-1.9bps) and BTPs (-2.6bps) saw much smaller declines. Indeed, the Franco-German spread moved back up to 69bps, which is its widest level since the second-round election results that led to gridlock in the National Assembly. On the topic of French politics, yesterday we heard that the left-wing New Popular Front alliance agreed to put forward Lucie Castets, an official for the city of Paris and relatively unknown, as their candidate for prime minister. As a  reminder the left-wing finished first in the election but well short of a majority. It will now be up to President Macron whether to nominate her as PM. Last night he commented that he would not appoint a PM until after the end of the Paris Olympics (on August 11).

In terms of US politics, it’s become clear that Vice President Harris has all-but-won the Democratic nomination, setting up a November general election contest with Donald Trump. As mentioned yesterday, the Associated Press have surveyed the Democratic delegates, and found that a majority of them support Harris as the nominee. And even though they could change their minds in theory, no other challenger has emerged against Harris, who has received endorsements from right across the party. Tonight we’ll also hear from President Biden, who’s delivering an Oval Office address at 8pm Eastern Time.

Those overnight losses on Wall Street are echoing across Asian equity markets this morning. Across the region, the Hang Seng (-0.59%) is leading losses with the Nikkei (-0.22%), the KOSPI (-0.11%) and the CSI (-0.10%) all trading slightly lower while the Shanghai Composite (+0.01%) is holding in slightly better.

Early morning data showed that Japan’s flash manufacturing PMI fell to 49.2 from the previous month’s 50.0. However, the weakness in manufacturing sector was largely offset by the flash services PMI surging to 53.9 in July from 49.4 in June. The latter reading was the strongest expansion since April, and came amid improving consumer demand and confidence. As a result, the flash composite output index rose to 52.6 in July from 49.7 in June.

On the back of this, the Japanese yen (+0.44%) continues to gain ground for the third consecutive day trading at 154.91 against the dollar. Meanwhile, the Bank of Japan (BOJ) is scheduled to meet next week with around 30% of economists expecting a hike, albeit with pretty much all saying the balance of risks are biased towards a hike around their central case scenario.

To the day ahead now, and data releases include the flash PMIs for July from the US and Europe. Other US data includes new home sales for June, and the advance goods trade balance for June. From central banks, we’ll get a policy decision from the Bank of Canada. And we’ll also hear from ECB Vice President de Guindos, the ECB’s Lane, and the Fed’s Bowman and Logan. Finally, earnings releases include IBM, AT&T and Ford.