Bank Downgrades, China Trade, UPS Earnings Weigh on Markets

Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets in the day ahead. Today is Tuesday, Aug. 8.

State of Play

Bank stocks are under pressure again after Moody’s downgraded the credit ratings of several regional banks. As of 0640 we are looking at some risk off:

• Stock index futures are pointing to a drop at the open led by small caps, which includes most of these regional banks. The Russell 2000 is down 1%. S&P 500 and Nasdaq are down 0.5% each;

• Commodities are selling off, with WTI crude oil down 1.5% to trade around $80.50/barrel and copper down >2%. Probably the overnight print of Chinese exports is to blame for that as those fell short of expectations;

• Bonds are seeing some bids at the long end of the curve with the 30-year yield down 10 basis points to 4.16%. The 10-year is down 7bps to 4.00%. At the short end of the curve, the 2-year is down just 3bps to 4.73% (yields move inversely to prices).

Known Events

Several earnings today: UPS (UPS 0.00%↑) just reported mixed earnings but more importantly lowered guidance. That stock is moving lower in the pre-market.

Later this morning Under Armour (UAA 0.00%↑), Burger King parent Restaurant Brands International (QSR 0.00%↑), Warner Music Group (WMG 0.00%↑), 21st Century Fox (FOX 0.00%↑), Seaworld Entertainment (SEAS 0.00%↑), and Choice Hotels (CHH 0.00%↑) are due to report.

After the close at 1600 we’ll hear from Rivian Automotive (RIVN 0.00%↑), AMC Entertainment (AMC 0.00%↑), Twilio (TWLO 0.00%↑), Lyft (LYFT 0.00%↑), Toast (TOST 0.00%↑), Akamai Technologies (AKAM 0.00%↑), Bumble (BMBL 0.00%↑), Duolingo (DUOL 0.00%↑), Take Two Interactive (TTWO 0.00%↑), Allbirds (BIRD 0.00%↑), and TopGolf Callaway (MODG 0.00%↑) provide an interesting cross-section of the economy.

We have at least one Fed speaker today as well: Philadelphia Fed President Patrick Harker gives the keynote speech at an event hosted by the Philadelphia Business Journal at 0830. Richmond Fed President Tom Barkin is supposedly speaking before the Loudoun County Chamber of Commerce but could not find independent verification of that.

Also at 0830 the US reports its balance of trade for June. Economists expect a trade deficit of $65 billion, slightly below last month’s $69 billion reading. Generally speaking US trade deficits are a good thing for the global economy because they mean American consumers are spending more money on things they don’t need.

China reports consumer and producer prices later tonight but these being official government figures it’s really just a question of what the authorities are willing to admit. Consumer prices are supposedly flat year-over-year.

The Bottom Line©️

Not a great start to the day with China trade, the bank downgrade, and now UPS earnings weighing on things. The UPS news is particularly worrisome because they cited lower demand from e-commerce, which is right in the wheelhouse of the US consumer. If Americans aren’t buying as much stuff (they don’t need) then that will weigh on UPS’ business.

Where the bank downgrades are concerned, it’s just 10 banks so far including M&T Bank (MTB 0.00%↑), Pinnacle Financial Partners (PNFP 0.00%↑), and Old National Bancorp (ONB 0.00%↑), but Moody’s was clear to point out there could be more where that came from. Several not so small banks were placed on watch, including State Street (STT 0.00%↑), BNY Mellon (BK 0.00%↑), Truist (TFC 0.00%↑), and US Bancorp (USB 0.00%↑). Portfolio holdings Bank of Hawaii (BOH 0.00%↑), New York Community Bancorp (NYCB 0.00%↑), and Zions Bancorp (ZION 0.00%↑) appear unaffected.

So today will be a good test of the bull market. Yesterday we rallied on no news. It will be interesting to see if investors’ risk appetite holds up in light of these developments. So far it’s not looking good but remember that bull markets typically see a reversal after the open.

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