- Dow, S&P close down, Nasdaq edges up
- Materials weakest S&P sector; utilities lead gainers
- Gold, dollar flat; crude, bitcoin fall
- U.S. 10-Year Treasury yield ~1.17%
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STOCKS GIVE UP EARLY GAINS AS DOW, S&P CLOSE LOWER (1605 EDT/2005 GMT)
Major U.S. averages closed well off their early highs to kick off trading in August, with the Dow Industrials .DJI and S&P 500 .SPX ending the session with modest declines.
While Square SQ.N shares jumped on news the company will acquire Afterpay Ltd (APT) for $29 billion, its rival in the payment processor space all weighed on the benchmark S&P 500 index, with Visa V.N , Mastercard MA.N , Global Payments GPN.N , Paypal PYPL.O and Fiserv FISV.O all among the biggest drags.
Economic data showed manufacturing activity grew at a slower pace for a second consecutive month, although there were signs bottlenecks in the supply chain have begun to lessen. Meanwhile, Senate negotiators announced they had finished drafting a 2,702-page infrastructure bill, paving the way for the debate of amendments.
Late in the session on Monday, Federal Reserve Governor Christopher Waller said the U.S. central bank could start to reduce its support for the economy by October, if the next two monthly jobs reports each show employment rising by 800,000 to 1 million, as he expects.
The July U.S. payrolls report is due on Friday, with expectations calling for nonfarm payrolls to increase by 880,000.
Below is your closing market snapshot:
(Chuck Mikolajczak)
***** CHANCES STILL SEEN FOR RETURN OF BUILD AMERICA BONDS (1411EDT/1811 GMT)
While the latest bipartisan plan to fund U.S. infrastructure does not include the return of a popular, federally subsidized municipal bond program, there is still hope for a comeback, Morgan Stanley analysts said on Monday.
The $4 trillion U.S. municipal bond market has been looking for Congress to pass something similar to the Build America Bond (BAB) program, which was created under the Obama administration as part of an economic stimulus law. It allowed states, cities, schools, airports, mass transit agencies, and others to sell for a limited time taxable debt with the federal government contributing 35% of interest costs.
Between April 2009 and when the authorization expired at the end of 2010, $181.5 billion of the so-called BABs were issued.
"We don't think the door is closed on a BABs return, as several paths for the policy remain plausible," Morgan Stanley analysts said in a report.
They pointed to possible routes, including as an amendment to the Senate bill, as a part of House Democrats' version of the bill, or in Democratic lawmakers' plans for budget reconciliation.
"In any case, we could learn the contents of both the bipartisan and reconciliation Senate plans as soon as this week given Senator (Chuck) Schumer's stated desire to have a vote before the scheduled August recess," the analysts wrote. "If BABs are not included in either, we'd likely then consider their comeback a long shot."
(Karen Pierog)
***** AUGUST U.S. STOCK PERFORMANCE ISN'T TOO HOT (1304 EDT/1704GMT)
The S&P 500 .SPX was able to advance 2.3% in July, the sixth straight month of gains for the benchmark index, thanks in part due to easy year-over-year EPS comparisons, a downward trend in interest rates that saw the 10-year yield fall below 1.3% and a Fed that continues to remain dovish, according to chief investment strategist at CFRA Research in New York.
But as the calendar flips to August, things could become more difficult for equities, as Stovall notes that since 1945, August has the third worst average monthly return and third most volatile performance.
In addition, Stovall said that while the S&P was higher 55% of the time in August, that success rates fell to merely 35% in the 23 years in which the S&P 500 set one or more highs in July. More disheartening news is that in the 13 times the index set six or more new highs in July, it declined by an average of 2.4% in August, showing a fall in price in 12 of the 13 instances.
Given the likelihood that EPS growth has peaked for this cycle, "stubbornly strong" inflation readings, the Delta variant threat as well as the possibility the Fed may contemplate its tapering timeline at its Jackson Hole meeting later this month, Stovall believes this "may cause investors to consider pocketing some of this year's gains" and rest of the third quarter may remain challenging.
(Chuck Mikolajczak)
***** TREASURY YIELD MOVES REFLECT POSITIONING MORE THAN ECONOMY –MORGAN STANLEY (1155 EDT/1555 GMT)
The dramatic rise in Treasury yields heading into March, and subsequent decline to five-month lows, reflects investor positioning more than the economic outlook, according to a strategist at Morgan Stanley.
Benchmark 10-year yields US10YT=RR rose rapidly in February to a one-year high of 1.776%, before tumbling just as quickly to five-month lows of 1.128% last month. At current levels as the notes yielded 1.182% on Monday, the Treasuries appear to point to a very bearish economic outlook.
Guneet Dhingra said in a report sent on Monday that “it is important to avoid the trap of forcibly fitting a narrative to lower yields, a trap investors dealt with merely four months ago.”
The decline in yields reflects investors unwinding trades that had bet on higher yields, he said.
“As 10-year yields fell last month, open interest – i.e., the number of open trades on 10-year Treasury futures – declined. This tells us that investors were not adding new positions based on a re-rating of the economy, or concerns about the Delta variant. Instead, they have been unwinding unprofitable older trades, originally positioned to play for higher yields,” Dhingra said.
In a similar way, the spike in yields heading into March was largely driven by Japanese investors selling bonds before the end of their fiscal year, he said.
Morgan Stanley expects yields to rise in the coming weeks to reflect a stronger economy and as investors price in a faster pace of rate hikes, saying that the “fair value” of 10-year yields is around 1.60%.
(Karen Brettell)
***** MONDAY DATA: FACTORIES LOSE STEAM, PUBLIC CONSTRUCTIONSPENDING PAUSED FOR INFRASTRUCTURE WINDFALL (1105 EDT/1505 GMT)
U.S. goods makers lost a bit of oomph in July as the emergence of the highly contagious COVID-19 Delta variant threw a monkey wrench into the supply chain conundrum.
Activity at U.S. factories unexpectedly expanded at a decelerated pace last month, according to the Institute for Supply Management (ISM) purchasing managers index (PMI) USPMI=ECI .
ISM PMI delivered a reading of 59.5 - the lowest level since January - representing a 1.1 point slide from the previous month and an unhappy downside surprise compared with the nominal consensus expectation for a gain to 60.9.
A PMI number above 50 indicates increased activity over the prior month.
The report illustrated the ongoing demand pivot from goods back to services, and provided cold evidence that the persistent demand/supply imbalance remains a headwind for manufacturing, which accounts for about 11% of the U.S. economy.
The good news is that the prices paid component backed down from record highs, suggesting that spiking materials prices due to demand/supply imbalance could be easing. Additionally, the employment index, dragged into contraction territory last month due to a worker drought, bounced back into the expansion column.
The bad news is the labor shortage persists, and increasing lead times and spiking prices are translating into a slowdown in new orders and a contraction in inventories.
Supply bottlenecks and rising input costs are also affecting factories worldwide.
"Companies and suppliers continue to struggle to meet increasing demand levels," writes Timothy R. Fiore, chair of ISM's Manufacturing Business Survey Committee. "As we enter the third quarter, all segments of the manufacturing economy are impacted by near record-long raw-material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products."
Here's what some of the survey respondents had to say: "Purchases continue to have long lead times due to shortages of raw materials and labor force, as well as logistics challenges. Increased costs are being passed to customers," (computers/electronics).
"Continue to have hiring difficulties and are unable to fill production and salaried jobs (due to) a lack of candidates. Raw materials are still in short supply, with longer lead times," (fabricated metal).
"Supply chain continues to be extremely challenging in a variety of categories. Having to place orders months ahead of time just to get a place in line," (machinery).
Global financial information firm IHS Markit also released its final take on July PMI USMPMF=ECI , coming in at a slightly more upbeat 63.4, 0.3 points higher than its initial "flash" reading released earlier this month, and 1.3 points higher than June's level.
Markit and ISM PMI indexes differ in the weight they apply to various components (new orders, employment, etc.).
The graphic below shows the disparity between the two. Finally U.S. expenditures on construction projects USTCNS=ECI increased by a paltry 0.1% in June, according to the Commerce Department, falling short of the 0.3% gain analysts expected.
Once again, spending on residential construction did the heavy lifting by rising 1.1% to counter severely depleted housing inventories in the wake of the great pandemic-driven suburban diaspora.
But a 1.2% drop in public works expenditures - most notably a 5.3% slide in highways/streets investment - capped the headline gain.
"Overall, nonresidential and public construction spending remains depressed," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "The residential side is still positive but is moderating, suggesting some loss of momentum even as inventories are low."
However, it should be noted that transportation projects are likely to enjoy a $1 trillion boost after the infrastructure spending bill, currently snaking its way through congress, is signed into law, as expected. So those slides likely represent an anticipation of the bill's eventual passage.
That passage was looking like a safer bet on Monday, which helped put Wall Street in a buying mood.
All three major U.S. stock indexes were green, with economically sensitive chips .SOX , smallcaps .RUT and transports .DJT enjoying comfortable leads.
(Stephen Culp)
***** WALL STREET KICKS OFF AUGUST ON THE PLUS SIDE (1022 EDT/1422GMT)
Major U.S. averages came out of the gate in August, usually among the weaker and more volatile months, with solid gains led by a rise of more than 1% in both the energy .SPNY and financial .SPSY sectors.
Stocks posted a muted reaction to economic data released a short time ago, which saw the final July manufacturing reading from Markit come in at 63.4, a touch higher than the flash reading of 63.1. However, data on the manufacturing sector from the Institute for Supply Management showed activity slowed to 59.5 in July, shy of the 60.9 expectation and the lowest since January.
Among the top boosts to the S&P 500 .SPX in early trading are Tesla TSLA.O , JP Morgan JPM.N , and Pfizer PFE.N , while Facebook FB.O , Apple AAPL.O and Global Payments GPN.N are the biggest drags on the benchmark index.
Below is your market snapshot:
(Chuck Mikolajczak)
***** WHEN M&A IS MADE IN BRITAIN (0914 EDT/1314 GMT)The U.S. takeover of engineer Meggitt MGGT.L is just the latest in a series of M&A moves targeting Britain recently.
Morrison MRW.L , Ultra ULE.L , Vectura VEC.L and Sanne SNNS.L are other examples but beyond the market moving headlines hard data also backs the view that Britain has proved a particularly fertile ground for M&A this year.
Cross-border M&A with a UK target has increased by 340% to $132.5 billion year to date, the latest Refintiv data to end-July show. That's about nine times the 39% growth seen in Europe and well above growth in the Americas (+200%) and Asia (+182%).
"Now after all the fear mongering post Brexit has been proven wrong UK companies are certainly of interest," says a London-based trader. "Many companies and also Private Equity too are looking to diversify in regard to location and are often underinvested in the UK".
And beyond the volumes, investors in UK Plc appear to like it, whereas it is becoming harder for acquirers to get a bargain even though British companies are not necessarily overvalued at this stage.
Meggitt shares shot up more than 60% this morning and that in turn has helped the domestically focused mid-cap and FTSE 250 index .FTMC race to a new record high.
"I am quite impressed by the massive premium which is being paid for Meggitt," says the trader.
And AJ Bell investment director Russ Mould notes: "Private equity firms have a reputation for trying to get a bargain, but their tactics have been fully exposed this year and it now seems rare for the first offer to be the winning one."
For more reading: BREAKINGVIEWS-UK plc’s latest sale is far from on the cheap
(Danilo Masoni)
***** S&P 500: FROM BULLISH FODDER TO BEARISH DUST? (0900 EDT/1300GMT)
Amid on-going Federal Reserve support, the economic re-opening, S&P 500 .SPX Q2 2021 year-over-year earnings growth running at nearly 90%, and now a $1 trillion infrastructure bill unveiled by U.S. Senators raising hopes of more fiscal stimulus, there certainly is plenty of fodder for bulls to be excited about.
So far, the S&P 500 index's .SPX record closing high was on Monday July 26. Since then the benchmark index has essentially chopped sideways, ending Friday just around 0.6% below that high.
With this, however, a contrarian measure of sentiment, based on the CBOE equity put/call (P/C) ratio, is exhibiting a pattern that has preceded periods of market instability:
With the SPX's all-time high close, the 5-day moving average of the P/C ratio fell to 41.6%. This put it just slightly above its relatively recent, multi-decade lows. This measure's depressed readings can flag an excessively bullish, or especially complacent market, vulnerable to a reversal.
Indeed, what may be a more robust bearish signal is when the moving average puts in a higher-low, against a higher SPX high. This pattern developed ahead of declines of varying degree over the last two years or so, including the severe sell-offs in late 2018 and early 2020.
In the wake of its 37.6% December 7 trough, which was its lowest reading since around the time of the Y2K tech-bubble peak, the measure has put in higher lows at 37.8% on January 14, 38.4% on February 11, and 39.6% on June 14. It has since vaulted to 54.2%, despite just a modest drop in the index.
Thus, this measure may be signaling cracks are forming in what has been solidly bullish sentiment. If so, instability may be just around the corner.
(Terence Gabriel)
***** FOR MONDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT- CLICK HERE:
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ SPXPC08022021 https://tmsnrt.rs/3C6TLSkopen https://tmsnrt.rs/37fge1e Early trade Aug 2 https://tmsnrt.rs/3fnHNKm ISM PMI https://tmsnrt.rs/3C7ovmc Markit v ISM https://tmsnrt.rs/2WGBAT7 Construction spending https://tmsnrt.rs/3jbxQAR Closing levels Aug 2 https://tmsnrt.rs/3Cayur1
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Terence Gabriel is a Reuters market analyst. The viewsexpressed are his own)
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