S&P 500 turns red, Nasdaq sinks >1%, DJI still positive
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Comm svcs weakest S&P 500 sector; energy leads gainers
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Dollar down; gold, crude, bitcoin advance
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U.S. 10-Year Treasury yield slides to ~4.01%
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KANYE SPLIT COULD BE A PAINFUL $2 BILLION PILL FOR ADIDAS TO SWALLOW (1308 EDT/1708 GMT)
Adidas AG's decision this week to drop rapper Kanye West was a needed step to save the German sportswear maker's brand image even if it comes with the pain of losing close to 2 billion euros ($2 billion) in sales next year, analysts say.
The company has faced immense public pressure to sever ties with the controversial musician and fashion designer after he made a series of antisemitic remarks on social media.
"While financially painful over the next year, Adidas made the right decision to terminate the Yeezy partnership given the negative media it has endured in recent months," Telsey Advisory Group analyst Cristina Fernandez said.
"Preserving the long-term health of the Adidas brand and standing by its values should be the company's priority."
Adidas said on Tuesday it would end production of Yeezy branded products and stop all payments to West, who now goes by Ye, and his companies, costing it 250 million euros in net income this year.
The company could lose somewhere between 1.3 billion and 1.8 billion euro in sales next year, and as much as 750 million in net earnings due to the split, according to estimates from Telsey, RBC Capital Markets and J.P.Morgan.
Experts said Adidas, which made 21.23 billion euros in total revenue last year, had no choice but to take the hit after companies like Gap Inc and Kering's Balenciaga ended their partnerships with Ye in the previous days.
"Adidas may have taken a bit too long to cut Kanye loose. Backlash against the brand had already hit a fevered pitch before the decision was made said Carol Spieckerman, of Spieckerman Retail, a retail strategy and communications agency.
"Even so, memories are short and most shoppers will likely be satisfied that Adidas cut ties at all."
Still, while Adidas retained the design rights to existing Yeezy products as well as previous and new colorways, it may prove tough for the company to rebrand the sneakers and enjoy the same popularity that the high fashion brand did with younger consumers.
"The price point will likely have to be lowered, and the core Yeezy consumer may not be as willing to make a purchase given the lack of tie-in with Kanye West," RBC Capital Markets analyst Piral Dadhania said.
New launches of Yeezy sneakers often sold out in minutes, even at prices of anywhere between $200 and $700.
Adidas cut its full-year guidance, just earlier this month citing lower demand in major Western markets among other reasons.
The divorce could be even more painful for Ye.
Forbes magazine on Tuesday said the end of the deal meant Ye's net worth shrank to $400 million. The magazine had valued his share of the Adidas partnership at $1.5 billion.
IS IT TIME TO WELCOME BACK THOSE WHO SOLD IN MAY AND WENT AWAY? (1220 EDT/1620 GMT)
The bounce off the October lows has been strong. In fact, from its October 13 intraday low to its October 26 intraday high, the S&P 500 index has rallied more than 11%. The benchmark index is last up about 8.2% month-to-date.
Thus, according to Ryan Detrick, chief market strategist at the Carson Group, October may just be living up to its reputation as both a potential bear market killer, but also the best month of a midterm year.
That said, there is still work to do on both fronts. The SPX is still down 19% from its early-January record close, and it did rise 9.1% in July.
In any event, Detrick says that stocks tend not to do so well in the first few quarters of a midterm year, and that was certainly the case this year. However, he adds that the good news is this quarter and the next two quarters have in previous years shown to be the strongest out of the entire four-year Presidential cycle.
Detrick also notes that many investors are aware of “Sell in May and Go Away,” which shows that the worst six months of the year, historically, for stocks are from May through Halloween.
The good news is we are about to leave those worst six months and enter into what has been some of the best times for stocks.
According to Detrick, looking at the November through April period shows that stocks have been higher every single time during a midterm year going back to 1950.
"That is 18 for 18 for those counting at home. Sure, six months from now this could be 18 for 19, but as we’ve been noting a lot on this blog lately, we are seeing many signs that a major market low could be taking place."
POLICY PIVOT NARRATIVE AT WORK: STOXX AT 5-WEEK HIGH (1146 EDT/1546 GMT)
Even as Big Tech earnings have disappointed, hitting Microsoft and Alphabet on Wall Street, and forecasters grow bearish about the economic outlook, global stocks are managing to shake off the gloom and extend this month's rebound.
More than earnings, it's the policy pivot narrative that seems to be setting price action and today's smaller-than-expected rate hike in Canada reinforced the perception that central banks may slow down the pace of their rate hikes.
The Canada surprise propped up bond prices and drove equities higher across the board. In Europe the STOXX 600 equity benchmark surged to its highest level in more the five weeks to end up around 0.6%, near the session's high.
Here's your STOXX snapshot:
HOUSES OF ILL REPUTE: NEW HOME SALES SLIDE, MORTGAGE RATES HIT MORE THAN TWO DECADE HIGH (1100 EDT/1500 GMT)
Wednesday's economic data releases sang a song market participants have been hearing on endless repeat for months; the housing sector is falling back to earth, and 2022 GDP is likely going to land below previous estimates.
Sales of freshly constructed U.S. homes slid 10.9% last month to 603,000 thousand units at a seasonally adjusted, annualized rate.
Even so, the number was less terrible than the 13.9% plunge analysts expected.
"This is all happening at a time when there remains a strong demographic demand for new for-sale homes due to millennials having children, pandemic increases in pet ownership, and the widespread adoption of hybrid/remote working," notes Kelly Mangold, principal at RCLCO, a real estate consulting firm.
"Many households would prefer to have more space, and may be in a housing situation that is not their ideal – so it will be important to monitor conditions closely, as there is still likely significant pent-up demand for when conditions begin to improve."
Still, the downbeat data follows the housing market script; rising home prices and interest rates are pushing monthly mortgage payments beyond the means of many potential buyers, a phenomenon echoed throughout the sector, from housing starts to homebuilder sentiment.
Speaking of the devil, mortgage rates climbed past the 7% mark last week, the highest level in more than two decades, according to the Mortgage Bankers Association (MBA).
The average 30-year fixed contract rate jumped 22 basis points to 7.16%, a level it hadn't seen since 2001.
As a result, applications for loans to purchase homes fell by 2.3%, while refi demand was essentially unchanged.
"The ongoing trend of rising mortgage rates continues to depress mortgage application activity, which remained at its slowest pace since 1997," says Joel Kan, MBA’s deputy chief economist at MBA.
Nancy Vanden Houten, lead U.S. economist at Oxford Economics, agrees.
"The additional erosion in homebuying affordability will put further downward pressure on housing activity in the months ahead," Houten says, adding that according to OE's calculations, the cost of buying a home is now "2% above the borrowing capacity of median income households."
As shown in the graphic below, overall mortgage demand is down 68.8% from the same week a year ago:
Finally, the Commerce Department released its advance take on goods trade balance and wholesale inventories for September.
The data shows the goods trade gap widening by 5.7% to $92.22 billion as imports contracted and exports increased.
The deficit growth bodes ill for current-quarter GDP, which got a boost from net exports in Q2 for the first time in eight quarters.
"Looking ahead, trade flows are likely to slow from current levels. We expect exports to weaken owing to a slowing in foreign demand and in response to a stronger dollar," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "And imports will be impacted by weakening domestic demand, as economies feel the effects of central bank tightening."
The value of goods stacked in the warehouses of U.S. retailers, inched down a negligible 0.1%, giving up a sliver of the 0.7% rise in August.
"Plugging these numbers and the trade data into our GDP spreadsheet generates a 2.8% (annual) forecast, down from our previous 3.7% estimate," says Ian Shepherdson, chief economist at Pantheon Economics.
Wall Street was mixed in morning trading, with market-leading tech and tech-adjacent megacaps dragging the S&P 500 and the Nasdaq into the red as results from Microsoft and Alphabet fueled fears of a global demand slow-down.
U.S. STOCKS CURB THEIR ENTHUSIASM AS TECH EARNINGS DRAG (0954 EDT/1354 GMT)
Major U.S. stock indexes are mixed early on Wednesday, with the tech-heavy Nasdaq Composite the worst performer after disappointing results and warnings from Microsoft and Alphabet raised fears of slowing economic growth.
Microsoft Corp on Tuesday projected second-quarter revenue below Wall Street targets across its business units while Google parent Alphabet Inc's disappointing ad sales sparked worries across the digital media sector on Tuesday as advertisers cut back on their spending.
The Nasdaq is down more than 1.5%, the S&P 500 is off around 0.6%, while the Dow Jones Industrial Average is in the green by 0.1%.
Communication services, info tech and consumer discretionary are taking the biggest hits among S&P 500 sectors. Healthcare is the leading gainer.
U.S. September new home sales are due at 1000 EDT. Expectations call for 0.585M units.
Here is a snapshot of Wednesday’s markets around 15 minutes into trading:
SMALL-CAP TECH: SHOWING UP BIGGER BROTHER (0901 EDT/1301 GMT)
CME e-mini Nasdaq 100 futures are off around 2% in premarket trade Wednesday, after disappointing results from technology-giant Microsoft, as well as Alphabet, sparked losses in other mega-cap companies and raised fears of slowing economic growth.
That said, of note, small-cap Russell 2000 futures are trading up around 0.3% ahead of the open.
In any event, and perhaps surprisingly, with this year's market meltdown, small-cap tech has actually held up better than large-cap tech. In fact, the Invesco S&P Small-Cap Information Tech ETF/Technology Select Sector SPDR Fund ratio is on track for its first positive year since 2016.
Through Tuesday's close, PSCT is down 21.5% year-to-date, while the XLK has fallen 26.1%. With this, the ratio is posting a 6.3% gain in 2022 as the smaller-caps have outperformed.
Meanwhile, the PSCT/XLK ratio has forged slightly above a weekly resistance line from its 2016 peak, and is just shy of its descending 200-week moving average (WMA):
The 200-week moving average capped strength in early 2021. The ratio last closed above this long-term moving average in late-October, 2017.
A weekly close back over the 200-WMA can suggest potential for a more significant relative turn in favor of small-cap tech.
A failure to overwhelm the 200-WMA, leading to a break back below the broken resistance line from the 2016 high, which should now act as support, as well as a violation of the support line from the 2020 trough, can put small-cap tech on the back foot again vs its bigger brother.
Top XLK holdings as of the end of September included Apple , Microsoft, and Nvidia, which accounted for half of the ETF's weighting. AAPL is due to report earnings Thursday after the close.
Top PSCT holdings as of the end of September included EXLService Holdings, Rogers Corp, and SPS Commerce, which accounted for around 13% of the ETF's weighting.
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