Stock Market Rally Under Pressure; Weekly Review

A newly confirmed stock market rally quickly ran into trouble, moving to “uptrend under pressure” after Tuesday’s sell-off. Crude oil prices, Treasury yields and Bitcoin fell significantly amid a broad “risk off” trade. General Mills (GIS) broke out on earnings, while Nike (NKE), Micron Technology (MU) and RH (RH) fell on guidance. China EV startups Nio (NIO), Li Auto (LI) and Xpeng (XPEV) reported booming June sales, with Tesla (TSLA) expected over the weekend.




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Stock Market Rally Under Pressure

The stock market rally came under pressure as the Nasdaq and S&P 500 tumbled below the lows of their June 24 follow-through days, with the Dow Jones later following suit. Crude oil prices fell while copper prices and Treasury yields sold off on recession fears. Nike (NKE), Micron Technology (MU) and RH (RH) fell on guidance.

Economic Data Cool

Three weeks after May’s hot CPI inflation data prompted the Federal Reserve to accelerate rate hikes, the May update of the Fed’s preferred inflation gauge suggested things aren’t quite as bad as they seemed. Meanwhile, U.S. consumer spending is suddenly looking a lot softer after May’s personal income and spending report carried a strong whiff of stagflation.

The latest batch of data left the 10-year Treasury yield, which had surged to 3.48% in mid-June, back under 3%. Slower-than-expected growth and lower-than-expected inflation could yield two possible responses from the Fed. Policymakers could decide to slow down the pace of rate hikes to avoid a hard landing. But the stock market’s failure to rally on the data suggests a more likely outcome: The Fed will stay aggressive because what’s really hurting consumption is inflation.

While consumer outlays rose 0.2% in May, that translated to an inflation-adjusted drop of 0.4%. On top of that, consumption data for April and Q1 were revised lower. The first-quarter’s 3.1% rise was slashed to 1.8% in a final update of Q1 GDP, which now shows the economy contracted at a 1.6% annual rate. The contraction, though, largely reflected a surge in the trade deficit. However, tracking estimates are pointing to another negative quarter of U.S. GDP growth in Q2 as consumption softens further.

The manufacturing sector is softening in tandem. The Institute for Supply Management’s monthly survey of purchasing managers showed factory growth sliding to a two-year low. The ISM index fell to 53 from 56.1, below expectations but still above the 50 neutral level. But the new orders subindex showed outright contraction, slumping from 55.1 to 49.2.

Bitcoin Skids Amid Crypto Cracks

Bitcoin fell back below $20,000, following Wall Street and aggressive growth stocks lower. Cryptocurrency hedge fund Three Arrows Capital has fallen into liquidation. Crypto exchange FTX is close to agreeing to buy BlockFi for $25 million, 99% below the crypto lender’s last valuation of $4.8 billion. Equity investors would be wiped out. That comes after FTX gave a $250 million emergency line of credit to BlockFi. Meanwhile, FTX reportedly is no longer in talks to buy reeling crypto lender Celsius. The SEC rejected Grayscale’s bid to turn its Grayscale Bitcoin Fund (GBTC) into a Bitcoin spot price ETF.

Energy Prices Fall On Recession Fears

Crude oil prices retreated for the week while June prices slid 4%, the first monthly drop since November. Gasoline futures tumbled amid demand destruction and recession fears, signaling further declines at the pump. The Energy Information Administration reported two weeks of declining U.S. crude stockpiles, after delaying the prior week’s report due to system errors. But gasoline and distillate inventories both rose 2.6 million barrels in the latest week, defying views for slim declines. OPEC+ met to confirm a previously announced August oil output quota increase, though it’s unclear if many members can actually increase production.

China EV Sales Boom

China EV sales boomed in the second quarter for that country’s emerging automakers, capped with an especially strong June. Xpeng (XPEV) took the Q2 sales crown among startups, delivering 34,422 EVs in Q2, nearly double year over year. June sales were the best since December and more than doubled from the same month a year ago. But Nio (NIO) and Li Auto (LI) also posted robust June and Q2 sales gains as Covid lockdowns affecting production and supply ease. Chinese EV and battery giant BYD (BYDDF) looked set to blow past Q1’s record tally of 286,329 EV and hybrid vehicles. IBD 50 stock LI fell back below a buy point after a huge run. BYD is trading around a buy point. Nio and Xpeng fell after big rallies.

U.S. Auto Sales Tumble

U.S. sales plunged in the second quarter for General Motors (GM), after GM and several other auto giants idled factories again due to the chip shortage and other supply challenges. GM sold 582,401 vehicles in Q2, down 15% but outselling Toyota and slightly topping views. The company said it continues to ramp up new EVs, including the Cadillac Lyriq SUV and Hummer truck. But GM expects to delay deliveries of unfinished vehicles to dealers into the second half of 2022. It guided Q2 earnings lower while maintaining full-year guidance. The annualized pace of overall Q2 sales was estimated at 13.4 million light vehicles, down from 17 million a year ago.

Micron Guidance Disappoints

Memory-chip maker Micron Technology (MU) beat Wall Street’s earnings target for its fiscal third quarter ended June 2 and matched views on sales. However, it badly missed estimates with its guidance for the current quarter due to weakening PC and smartphone sales. Shares fell to a fresh 52-week low, with chip foundry giant Taiwan Semiconductor (TSM) and several chip-equipment makers also skidding. Wall Street analysts are bracing for a wave for chipmakers cutting guidance during the second-quarter earnings season.

General Mills Jumps; Simply Red

General Mills (GIS) reported a 23% EPS gain in fiscal Q4, with revenue up 8% to $4.9 billion, both beating. GIS stock broke out to a new high. Simply Good Foods (SMPL) reported EPS unexpectedly rose 2% in its Q3, with sales up 11% to $316.5 million. But the Atkins-branded snacks maker warned high inventory levels will curb Q4 growth. SMPL stock dived.

Nike Guides Low

Nike (NKE) reported Q4 EPS fell 3% while revenue dipped 1% to $12.2 billion as China lockdowns forced store and factory closures. Both beat views, but it was the first sales decline in seven quarters. The athletic shoe and apparel giant announced soft guidance for the current quarter, citing a strong dollar and freight costs. Shares tumbled.

Vaccine Stocks

Vaccine stocks diverged last week after the Food and Drug Administration asked manufacturers to update their Covid shots to include an omicron-fighting element. The agency says the companies should begin testing now to launch in the fall. The vaccines would target the B.A.4 and B.A.5 sub-variants of omicron, as well as the original strain. So far, Pfizer (PFE), Moderna (MRNA) and Novavax (NVAX) have tested vaccines targeting the B.A.1 sub-variant, an earlier iteration of omicron.

RH (RH) trimmed full-year estimates, citing weaker demand and a deteriorating economic environment. It now sees revenue down 2%-5% vs. prior targets for flat to up 2%. Shares of the upscale furniture retailer tumbled to a fresh two-year low.

Paychex (PAYX) reported fiscal Q4 adjusted EPS rose 13%, with revenue up 11% to $1.14 billion. the payroll processing firm guided slightly higher for fiscal 2023. PAYX shares fell sharply on recession fears.

Intel (INTC) is cutting prices for its 12th Generation Core processors, which it debuted in November, due to weakening PC demand, DigiTimes reported. Intel, rival AMD (AMD) and PC makers fell.

Apple‘s (AAPL) efforts to make its own 5G modem chip have hit a developmental snag. That means Qualcomm (QCOM) will retain the business through at least next year’s iPhone model, a prominent analyst said.

Schnitzer Steel (SCHN), a top manufacturer and exporter of recycled metal products, reported fiscal Q3 EPS rose 18% while revenue grew 23% to $1.01 billion, both beating. But SCHN stock held near 16-month lows amid falling metal prices and recession worries.

Spirit Airlines (SAVE) said it will delay until July 8 a shareholder vote on a planned merger with fellow ultra-low-cost carrier Frontier (ULCC) that had been set for Thursday. Spirit said it wanted more time to continue talks with Frontier and rival suitor JetBlue (JBLU).

Constellation Brands (STZ), parent of Corona and other alcoholic beverage brands, reported fiscal first-quarter results that beat expectations. Constellation stuck with its full-year profit outlook, despite rising ingredient costs.

Walgreens Boots Alliance (WBA) beat analyst expectations for its Q1 financial results, but EPS still fell 30% and revenue sank 4% to $32.6 billion amid shrinking demand for Covid vaccinations, opioid settlements and investments in its health care business. Walgreens also decided against selling its Boots pharmacies in the U.K. due to volatile market conditions.

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