David Malpass, Walmart and Cisco Ride to Rescue: Taking Stock

(Bloomberg) -- Stock futures popped last night after China said it’ll resume talks with the U.S. in late August after a breakdown two months ago, and they’ve held their gains ever since.

The metals are bouncing back, Walmart’s numbers look great on a first glance (shares screaming higher by more than 10% pre-market), as did Cisco last night (shares up almost 7%), all which should all help sentiment in three sectors that took a royal beating during Wednesday’s rout in tech, consumer discretionary, and materials.

And so it remains that trade and the incremental droplets of news related to it remain the number one thing that is driving this market. While these new talks are being called "low-level" -- between Vice Commerce Minister Wang Shouwen and Under Secretary for International Affairs slash former Bear Stearns Chief Economist David Malpass -- they are still having a sizable impact on the tape, especially considering what we just learned about another miserable earnings report from a China tech major.

JD.com, the $46 billion market cap Amazon-like e-commerce giant, is pulling a Tencent with a blowout loss that was about eight times larger than what analysts expected. The stock is dipping ~5% in early trading, something that perhaps may have dented the futures given the recent alarming developments in tech and emerging markets, if it wasn’t for this new shining light of trade hope.

Meanwhile Turkey remains a giant thorn in the market’s side in the near term, and thus there should be an immense amount of focus on the 9am investor call with Turkey’s Treasury and Finance Minister Berat Albayrak and a slew of big banks like Citi, Deutsche Bank, and HSBC, which comes almost 24 hours after the first reports hit on Qatar’s $15 billion investment.

Reasons for Yesterday’s Selloff

Wednesday’s risk-off session turned out to be the heaviest volumes we’ve seen since late June. The defensive proxies in the market were the sole sectors in the green, from the REITs to the utilities, telco and staples. Something we learned from the latest batch of quarterly fund filings is that a lot of hedge funds pulled back from their holdings in tech during the second quarter (the first decline in aggregated tech holdings since 2016) and reallocated into some of these more defensive areas.

Here’s what caused the selloff:

  • Tencent Spillage -- The e-minis slid Wednesday morning almost immediately after the Chinese Internet megacap published its numbers (TCEHY ADRs fell as much as 10% at one point) and became the latest in a string of disconcerting earnings misses in the tech space, starting with Netflix, Facebook, and Twitter in late July, Microchip last week, and more recently with a host of whiffs in Asia YY, Vipshop, HUYA, Hon Hai, and Sunny Optical. This weighed on tech across the board, from the FAANGs to the BATs (two very crowded trades), and added to the bloodletting that’s been going on in the semiconductors of late (SOX has dropped almost 5% since Morgan Stanley waved the caution flag on the sector last Thursday). We’ll see how tech reacts to Cisco’s pop and JD.com’s flop this morning, though there’s plenty on the table with Nvidia and Applied Materials tonight, followed by the main event in Alibaba next Thursday.
  • Commodities Rout -- Copper sank into a bear market, oil edged closer to a 10-week low, and precious metals’ ugly charts got uglier. These were all things that led to the energy and materials complexes underperforming all other sectors in the S&P 500 (XLE had its worst day since early Feb.) and pressure on the industrial bellwethers with heavy commodity exposure, like Caterpillar and Deere, which both fell more than 2%. The widely agreed upon culprits were twofold: Turkey contagion and China trade jitters
  • Retail Reversal -- The XRT closed at a record on Tuesday only to stage a daunting reversal that turned into its worst one-day loss in six months. You can thank a trigger-happy trading crowd that collectively decided to ring the register on Macy’s after seemingly strong earnings; the concerning margin commentary on the call added fuel to the fire and led to the shares plummeting 16% to close at the day’s low. We’ll be looking for more signs of quickfire profit taking when J.C. Penney reports this morning and Nordstrom hits after the bell.

Reasons for Yesterday’s (Slight) Bounce

  • Qatar to the Rescue -- The bottom was in once reports came out saying Qatar pledged a direct investment of $15 billion in Turkey, helping to skirt a financial crisis that has every trader involved in emerging markets, currencies, equities, and pretty much every other asset class nervously scanning the wires for incremental developments
  • Technicals -- The psychologically important 2,800 support level on the S&P 500 was nearly pierced yet again (the intraday low was 2,802.49), making this the fifth successful test of the level since the breakout in mid-July. Meanwhile, bids flowed in the second the Dow fell below 25,000 and its 50-day moving average of 25,004.

Notes From the Sell Side

Evercore ISI’s George Galliers says Tesla’s Model 3 production is on track after a site visit, adding that the company is able to produce 6,000 of the vehicles a week. Separately, Bernstein’s Toni Sacconaghi, one of the analysts who felt Musk’s wrath in that cringeworthy earnings call in May, is lifting his price target on market perform-rated Tesla to $325 from $265 to bake in the go-private probability.

Morgan Stanley has a few big calls today, starting with Ford’s dividend being at risk of a substantial cut (forecasts regular dividend halved and no payment of special dividend in 2019) -- recall Berenberg had a similar warning last week, calling the quarterly distribution "increasingly fragile" due to the rapidly deteriorating pace of cash flow -- MS is also saying recent weakness in the E&Ps is overdone, noting that the rising capex outlooks seen in 2Q earnings "does not mean a shift away from capital discipline"; top picks into year end are OXY, HES, COP, and CLR.

And Morgan Stanley is also turning negative on medical office REITs and more bearish on the hospitals after an analysis of data for more than 6,000 hospitals in the U.S. find that 18% screen as "at risk" of closure or "weak." The bank is downgrading both Healthcare Realty Trust and Healthcare Trust of America to equal-weight as a result.

Goldman upgrades Avalara, the tax software company that got caught up in the post-IPO craze over the past few months (shares more than doubled within days of the listing only to flounder ever since). The analyst, who is now the only buy on the Street versus six at hold, cites a strong secular tailwind from e-commerce growth, a lack of a clear competitive threat, and a potential regulatory catalyst with the recent Supreme Court ruling.

Tick-by-Tick Guide to Today’s Actionable Events

  • 7:30am -- JCP, MSG earnings
  • 8:00am -- JD, DESP earnings call
  • 8:30am -- Philadelphia Fed, Housing Starts, Initial Jobless Claims
  • 8:30am -- JCP earnings call
  • 9:00am -- Republic of Turkey to hold investor call
  • 9:20am -- Cisco CEO Chuck Robbins on Bloomberg TV
  • 10:00am -- FCC Chair Ajit Pai testifies before Senate committee
  • 10:00am -- MSG earnings call
  • 10:30am -- EIA natgas storage
  • 4:01pm -- AMAT, VNET (roughly), ARAY earnings
  • 4:05pm -- JWN, ZOES earnings
  • 4:15pm -- VJET earnings
  • 4:20pm -- NVDA earnings
  • 4:30pm -- AMAT earnings call
  • 4:45pm -- JWN earnings call
  • 5:30pm -- NVDA earnings call

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