Warning Shot From Germany Is Spooking This Market: Taking Stock

(Bloomberg) -- Stock futures have been tumbling all morning (more than 20-handle reversal from the e-minis peak) as Italy’s political mess resurfaces, China reiterates its hard stance on tariff threats, India enters the trade conversation with levies on U.S. goods, and -- perhaps most importantly -- Daimler sends a warning shot (shares down ~4% in Frankfurt), becoming the first prominent company to blame escalation trade tensions between the U.S. and China for a profit forecast cut.

Note that there was a slight bounce in the tape at ~6:54am on this headline from Chinese media source MNI: "China Engages U.S. Seeking to Avert Tariffs"

But assuming everything stays the same, this would mark the fourth time in five days that we open lower on the S&P 500 -- the last three times, the intraday lows were established in the first hour or so of trading as bids quickly came charging in, allowing the narrative to remain that markets continue to brush off any and all trade talk, and even that $400 billion threat from Trump.

Not So Bullish

The cautiously optimismic views (or downright bearish ones for the near term) from big name strategists on the Street continue to pile up this week: Morgan Stanley called for downside risk in the tape, Citi talked about a bubble in growth stocks, Stifel predicted a 5% dip in stocks by the end of summer, and now Goldman’s David Kostin, who isn’t exactly sounding overly bullish in his latest note.

Kostin lifted his EPS estimates on the S&P 500 for each of the next three years, but he maintains all of his targets (a modest 3% rise to year-end view of 2,850 followed by a 5% gain in 2019 to 3,000) as "appreciation potential will be constrained" by trade tensions, tightening monetary policy, a flattening yield curve, and the upcoming Congressional mid-term elections. As an aside, he upgraded tech to overweight and downgraded industrials.

FAANGs should continue to dominate the conversation given the sheer resilience and record surges seen throughout the the complex -- Facebook topped $200, Alphabet briefly breached $1,200, Amazon broke above $1,750, and Netflix gapped to $417 after breaking $400 on Tuesday -- except for Apple, which is heavily underperforming the others (AAPL -0.2% in June vs the rest of FAANG up ~10% on average) on all of the trade war jitters.

But the semis should also play a big role today, as Micron (up 4% pre-market) may give the SOX an early lift, after the group showed some relative weakness in the early part of the week (China again). So far the focus from the bulls are on the company’s strong guidance, the favorable DRAM comments, and the overblown NAND fears. Chip equipment names that have been in the doghouse lately on capex concerns, like Lam Research and Applied Materials, might see a relief rally as a result.

Tariffs, Guns, and Money

We’ll also be watching the trade proxy auto stocks, like GM and even TSLA, after Daimler blamed tariffs for lower Chinese sales of Mercedes SUVS, leading to a profit warning less than two months after the carmaker issued an upbeat forecast (Stoxx 600 Autos & Parts index fell ~2.5%).

Gun stocks RGR and VSTO might be volatile after AOBC whipped around in the aftermarket, ultimately falling almost 5% after what appeared to be a better-than-expected sales view. The stock remains indicated lower this morning, so watch for weakness all around.

And the banks are on notice ahead of tonight’s stress test (DFAST is tonight, CCAR won’t be until a week from today). The BKX waded in negative territory just minutes into yesterday’s closing bell, but the set-up still looks OK, given the optimism going into the catalysts (Kostin did say in his note that banks should benefit from the CCAR results) and the fact that the index has hugged the 200-day moving average four times since April before springing right back.

Notes From the Sell Side

Analysts keep trying to outdo one another on these big tech names, though who can blame them given the parabolic moves throughout the space: Pivotal Research lifts its NFLX price target to $500 (matching GBH’s street high from Tuesday, and a level that is more than $150 above the average of more than 40 analysts) while Nomura Instinet shifts its target on SQ to a street-high $82 (Dorsey’s babies keep rolling) on the potential to disrupt the restaurant payments industry.

And Kostin wasn’t the only one churning out research at Goldman last night. Brett Feldman recalibrated some ratings in the telecom services space (upgrading VZ and CHTR to buy after material underperformance, downgrading DISH to neutral and SIRI to sell) while Rod Hall assumed coverage on a bunch of opticals and component stocks (upgrading LITE to buy, GLW to neutral, and slashing INFN to neutral and ARRS to sell)..

Morgan Stanley is hammering one of the weakest links in the consumer staples space in KMB, initiating the stock at an underweight on weaker long-term top line growth prospects.. and a couple heavy machinery / crane-maker names are getting love this morning, with Jefferies upgrading TEX to buy and JPMorgan boosting MTW to a neutral..

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

  • Today -- OPEC International Seminar in Vienna day two
  • 7:00am -- Bank of England rate decision
  • 7:00am -- DRI, PDCO earnings
  • 7:20am -- Wilbur Ross on Bloomberg TV
  • 7:45am -- KR earnings
  • 8:00am -- Wilbur Ross speaks at SelectUSA Investment Summit
  • 8:00am -- HDS investor day
  • 8:00am -- World Cup: Denmark vs Australia
  • 8:30am -- Philadelphia Fed, Initial Jobless Claims
  • 8:30am -- BKS earnings
  • 8:30am -- CACI guidance call
  • 8:45am -- WFC CEO Timothy Sloan speaks at Bloomberg Breakaway CEO Summit
  • 9:00am -- FHFA House Price Index
  • 9:00am -- Steven Mnuchin speaks at SelectUSA Investment Summit
  • 9:45am -- Bloomberg Consumer Comfort
  • 10:00am -- Leading Index, Eurozone Consumer Confidence
  • 10:30am -- EIA natgas inventories
  • 11:00am -- S at Wells Fargo 5G Forum
  • 11:00am -- World Cup: France vs Peru
  • 11:30am -- Atul Gawande speaks at AHIP Institute & Expo
  • 12:30pm -- ETR analyst day
  • 1:00pm -- INCY investor event
  • 1:15pm -- Michael Bloomberg speaks at Bloomberg Breakaway CEO Summit
  • 2:00pm -- World Cup: Argentina vs Croatia
  • 4:05pm -- SGH, AMSWA earnings
  • 4:15pm -- RHT earnings
  • 4:30pm -- First round of stress tests for U.S. banks
  • 7:00pm -- NBA Draft
  • Tonight -- IPOs to price: Autolus Therapeutics (AUTL), DERMAdoctor (DDOC)

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