* U.S. equity indexes off earlier highs, Nasdaq leads
* Cons disc leads S&P sector gainers; materials weakest
group
* Gold edges up; dollar, bitcoin flat; crude weak
* U.S. 10-Year Treasury yield ~1.18%
Aug 2 - Welcome to the home for real-time coverage of
markets brought to you by Reuters reporters. You can share your
thoughts with us at markets.research@thomsonreuters.com
CHANCES STILL SEEN FOR RETURN OF BUILD AMERICA BONDS (1411
EDT/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/1704
GMT)
The S&P 500 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 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 CONSTRUCTION
SPENDING 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)
.
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, 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
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, smallcaps and
transports enjoying comfortable leads.
(Stephen Culp)
*****
WALL STREET KICKS OFF AUGUST ON THE PLUS SIDE (1022 EDT/1422
GMT)
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 and
financial 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 in early trading
are Tesla, JP Morgan, and Pfizer, while
Facebook, Apple and Global Payments 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 is just the
latest in a series of M&A moves targeting Britain recently.
Morrison, Ultra, Vectura and Sanne
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 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/1300
GMT)
Amid on-going Federal Reserve support, the economic
re-opening, S&P 500 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 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:
(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
