Wall Street set to edge up as earnings season begin


US stocks were on course to edge higher at the open on Tuesday, recovering some of the previous session’s losses as investors weighed the reimposition of lockdown measures in parts of the US and the start of quarterly results season.

Futures tipped the S&P 500 to rise 0.3 per cent, after a turbulent session in New York on Monday, where the benchmark stock index ended almost 1 per cent lower after briefly crossing into positive territory for the year. The tech-heavy Nasdaq Composite fell 2.1 per cent.

The Cboe’s Vix index of S&P 500 volatility, known as Wall Street’s fear gauge, was elevated above 30 on Tuesday following the sharp declines.

JPMorgan warned of “significant uncertainty” ahead as it opened Wall Street earnings season by outlining almost $10.5bn of loan loss charges in the second quarter.

“Equities are navigating through a ‘zone of uncertainty’, because earnings visibility remains elusive and fresh spikes of Covid-19 are occurring in the majority of US states, delaying and even rolling back economic reopening,” said Terry Sandven, chief equity strategist at the wealth management unit of Minnesota-based US Bank.

Europe caught up with Wall Street’s late losses on Tuesday, with the continent-wide Stoxx 600 falling 1.2 per cent. London’s FTSE 100 dropped 0.4 per cent, while Frankfurt’s Xetra Dax shed 1.4 per cent.

Elizabeth Geoghegan, fixed income portfolio manager at Mediolanum, said it was notable that stock markets have risen so high while the yield on US 10-year Treasuries has been depressed. On Tuesday, it slipped a further 0.01 percentage points to move closer to 0.6 per cent, as investor demand for the haven asset remained strong.

“It is a sign of how cautious investors are about this rally — they are participating in this uptick but they’re not willing to let go of their haven Treasury assets,” she said.

The decline in US equities on Monday was spurred in part by California’s decision to join Texas and Arizona in rolling back its economic reopening. Gavin Newsom, governor of the most populous US state, ordered the closure of bars, cinemas and dine-in restaurants in an effort to contain a sharp rise in Covid-19 cases and hospitalisations.

Investors are bracing themselves for a grim US earnings season, with S&P 500 companies expected to report a 45 per cent plunge in quarterly profits. That would be the biggest drop since the depths of the 2008-2009 financial crisis.

Chris Beckett, head of equity research at Quilter Cheviot, said that valuations of tech companies were reasonable, considering that they are high-quality, monopolistic businesses that have prospered from the shift towards working from home and ecommerce during the pandemic.

He added that outlooks that will be provided by companies during earnings season would help direct stocks, since investors already expect second-quarter results to be awful.

“We get better access to company management at a point where they feel more able to give a clear steer of what current trading looks like and what the future looks like,” he said.

But the closely watched Bank of America survey for July revealed that fund managers viewed tech stocks as the best short position to hold, given their high valuations and stretched performance.

However, disruptions to the economic recovery from the pandemic remains the major focus for investors. “The biggest threat to the overall stock market now is probably a renewed hit to economic activity from the recent resurgence of coronavirus cases,” said John Higgins, chief markets economist at Capital Economics.

Equities in the Asia-Pacific region recorded broad losses. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks shed 1 per cent.

The fall for Chinese stocks — after the CSI 300 notched its best week in five years — followed the latest escalation of US-China tensions. The US vowed on Monday to adopt a tougher stance against China’s territorial claims in the South China Sea and maintain pressure over alleged human rights abuses in Xinjiang.

Offshore investors shifted out of Chinese stocks at a record pace with net sales of Rmb17.4bn ($2.5bn) via stock connect programmes between Hong Kong and mainland bourses on Tuesday, according to Financial Times calculations based on Bloomberg data.

Better than expected China trade data failed to bolster sentiment. Analysts at Nomura warned that Chinese exports could be hit by falling demand as other countries shift to producing medical equipment domestically.

Crude prices dropped, hit by the prospect that renewed restrictions on US states could undermine oil demand. Brent crude, the international benchmark, was down 0.9 per cent at $42.33 a barrel while US marker West Texas Intermediate fell 1.2 per cent to $39.61.

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