* Major U.S. indexes end green; transports outperform
* Energy leads S&P sector gainers; comm svcs sole loser
* Dollar inches up; gold slips, crude, bitcoin down
* U.S. 10-Year Treasury yield ~1.17%
Aug 3 - 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
ABOUT FACE TO A RECORD (1605 EDT/2005 GMT)
U.S. stocks were able to halt a brief swoon in the early
portion of the trading day, as the major averages found their
footing and left the S&P 500 at a record high by the
closing bell.
Solid data on factory orders and business spending helped
lend support, indicating strength remains in the manufacturing
sector even as a large swath of consumer spending shifts towards
the services portion of the economy.
Still, the Delta variant continues to create uncertainty,
with New York City becoming the first major U.S. city to require
proof of a COVID-19 vaccination for customers and staff at
indoor businesses such as restaurants and gyms.
Data on tap for Wednesday includes the ADP employment report
and readings on the service sector from Markit and the Institute
for Supply Management.
Below is your closing market snapshot:
(Chuck Mikolajczak)
*****
NEW FED REPO FACILITIES SEEN BOOSTING DEMAND FOR TREASURIES
(1406 EDT/1806 GMT)
New domestic and foreign standing repurchase agreement
(repo) facilities launched by the U.S. Federal Reserve last week
to backstop money markets should increase demand for Treasuries,
according to a Cornerstone Macro report on Tuesday.
The repo facilities, which allow the Fed to take in
Treasuries and other securities from eligible counterparties in
exchange for cash, will provide banks and foreign institutions
with an incentive to invest some of their low-yielding cash
assets into higher-yielding, longer-dated Treasuries, it said.
The new domestic standing repo facility, which will allow
large banks to join the ranks of primary dealer counterparties
starting Oct. 1, conducts overnight operations with a minimum
bid rate of 0.25% and with an aggregate operation limit of $500
billion.
The repo facility for foreign and international monetary
authorities has an overnight rate of 0.25% and a
per-counterparty limit of $60 billion.
"Banks will find it advantageous to invest some of their $4
trillion in cash reserves into Treasuries, knowing that they can
quickly turn them back into cash if needed," the report said.
"Similarly, foreign official institutions will find it
advantageous to convert some of their $250 billion in Fed
reverse repos into Treasuries."
The Fed's repo program has been little used over the past
year as firms navigate elevated reserves and look for options
for investing excess cash in the banking system.
(Karen Pierog)
*****
BUYBACK GROWTH SEEN OUTPACING DIVIDENDS. GOOD OR GREAT NEWS?
(1342 EDT/1742 GMT)
Stock buyback backs should increase "substantially more
quickly" than dividends over the next four quarters, according
DataTrek co-founder Nicholas Colas.
Before the pandemic Colas says more than 90% of S&P 500 net
operating earnings were returned to shareholders in buybacks and
dividends with 56% going to buybacks in 2019 and 37% to
dividends.
With S&P earnings now 23% higher than in 2018/2019, Colas
expects to see companies "dramatically increase" shareholder
cash returns for rest of 2021 and in 2022.
While markets suggest 2021 profits are sustainable,
corporate managers tend to be more cautious - likely keeping
excess cash into 2022, keeping dividends largely the same and
using remaining cash flow for buybacks with a bit for M&A maybe.
One issue is that uncertainties around 2022 may boost the
case for buybacks over dividend increases as "every CEO we’ve
ever met knows cutting the dividend inevitably drives corporate
boards to look for the company’s next CEO."
But while buyback increases are "certainly a positive for US
large cap stocks over the rest of the year and into 2022," Colas
notes they are "good, but not great" news for U.S. equities.
Since companies already returned "virtually all their excess
cash flow before the pandemic" this isn't something new that
would materially change valuations, he argues.
In the last 5 years, Colas also points to the fact that
three heavy hitting sectors accounted for 64% of buyback dollars
with tech at 31%, financials at 21% and healthcare at 12%. And
the aggregate weighting of the group has increased to 52% from
40% with tech expanding its dominance.
(Sinéad Carew)
*****
SECOND-QUARTER EARNINGS SEASON HITS THE SEVENTH-INNING
STRETCH (1330 EDT/1730 GMT)
Second-quarter reporting season is whizzing by in a blur,
with nearly 70% of the companies in the S&P 500 having had their
turn at bat.
And taken together, they are knocking it out of the park.
Of those, a record 87.6% have beaten consensus expectations,
according to Refinitiv IBES.
And the beats are bigger than usual. Companies are breezing
past expectations by a margin of 16.3%, in aggregate, well above
the long-term average (since 1994) of 3.9%, per Refinitiv.
So far, the sectors with the highest beat rates are
technology, financials, communications
services and consumer discretionary.
Analysts now see annual S&P earnings growth of 90.2% for the
April to June period, a substantial increase from the 54% growth
expected at the beginning of the quarter, and nearly double the
consensus rate as of January 1.
All told, Refinitiv shows the forward four-quarter S&P 500
P/E ratio currently sits at 21.4.
Looking ahead, year-on-year comparisons begin to grow
tougher for many sectors.
Even so, of the 52 companies having provided
pre-announcement for third-quarter results, 32 are positive and
17 are negative, resulting in a net N/P ratio of 0.5, stronger
than the second-quarter's 0.7 N/P ratio.
The graphic below, courtesy of Refinitiv, shows historical
and estimated earnings, net income and revenue growth rates
(click to enlarge):
(Stephen Culp)
*****
IN THE COVID AGE, FRUITS OF HEALTH CARE INNOVATION ABOUND
(1257 EDT/1657 GMT)
The pandemic has created a dynamic environment for
innovation and investment in the global health care arena,
according to Saira Malik, CIO, head of global equities at
Nuveen.
As Malik sees it, governments will prioritize more
aggressive investment in local health care systems and
infrastructure as the world continues to combat COVID-19, deal
with its variants, and acknowledge the prospect of new viruses
in the future. This increased capital spending "could provide a
long-term tailwind for life science companies."
Meanwhile, with headlines focused squarely on COVID-19,
Malik believes progress in emerging biotech has flown under
investors’ radar. With this she says that "several new
modalities/platforms, for example, allow scientists to more
precisely target diseases through developments in MRNA and smart
antibodies." Nuveen believes the value these modalities can
generate will be recognized over the next several years.
Malik says that we’ve seen the fruits of health care
innovation in lower numbers of hospitalizations and deaths
caused by the Delta variant against previous strains. She
believes further innovation should yield solutions that improve
diagnosis and treatment, while providing compelling investment
opportunities.
"Health care returns have lagged the broad equity market
since the pandemic began, despite generating stronger relative
earnings growth. This has led to significant valuation
discounts, making the sector a more attractive source of upside
potential."
(Terence Gabriel)
*****
BOFA RECOMMENDS “UNDERPRICED” SHORT-DATED S&P CALL OPTIONS
(1202 EDT/1602 GMT)
Investors should buy short-dated call options on the S&P 500
to benefit from asset bubbles that are likely to continue as the
Federal Reserve hesitates to tighten monetary policy, Bank of
America strategists said in a report on Tuesday.
The Fed last week said the U.S. job market still had "some
ground to cover" before it would be time to pull back from the
economic support the U.S. central bank put in place in the
spring of 2020 to battle the coronavirus pandemic's economic
shocks.
“The Fed is not even discussing the path for rate hikes,”
and Bank of America believes that the U.S. central bank won’t
signal plans to taper bond purchases until at least September,
the analysts said.
“Big picture, this means investors will likely enjoy a
high-strike Fed put for longer and face even bigger asset
bubbles (and bigger fragility risks) as a consequence,” Bank of
America said. “Some are even calling for the S&P to hit 5,000
before the Fed is forced to tighten. Trading bubbles is all
about riding the wave without needing to call the top,” they
added.
The S&P 500 index hit a high of about 4,410 on
Tuesday.
Investors should buy short-dated call options, which
underprice the possibility of further stocks gains, the analysts
said, noting that one-month calls on the S&P would have made
money in 10 of the last 13 years and would have consistently
outperformed the S&P index since 2018.
“Conservative investors can use the strategy as stock
replacement while more aggressive investors can overlay long
calls to an existing equity position for additional (but
risk-limited) gearing in case the party keeps going,” they said.
(Karen Brettell)
*****
FACTORY ORDERS COUNTER ISM, NOTCHING A HEALTHY GAIN (1120
EDT/1520 GMT)
Data released on Tuesday provided sturdy reassurance that
while the manufacturing sector's expansion might be on the wane,
the sector still appears to have some gas in the tank.
"We expect a solid growth path for the factory data through
2021, capped by capacity constraints and supply chain problems,"
writes Mike Englund, chief economist at Action Economics.
New orders for goods made by U.S. factories
increased by 1.5% in June, according to the Commerce Department,
representing the 13th monthly gain over the last 14.
It was a more robust increase than the even 1% gain
predicted by economists, but represents a slowdown from the
previous month's upwardly revised 2.3% jump.
Factory orders were up a remarkable 18.4% from a year ago.
Excluding transportation orders - which could be in a
holding pattern pending lawmakers' anticipated passage of a
bipartisan infrastructure package - the increase was a more
vigorous 1.4%.
And while inventory growth gathered some steam, so did
shipments, leaving months supply virtually unchanged at about
1.5.
The Commerce Department also revisited its initial take on
new orders for durable goods, which represent
everything from waffle irons to fighter jets. Across the board,
the data was a bit stronger than originally reported.
The 0.9% gain, helped by a 17% increase in nondefense
aircraft, was limited by drops in defense, computers and autos.
Core capital goods - which strips out defense
and aircraft, and is considered a proxy for business spending
plans - was bumped up 0.2 percentage points to 0.7%, and also
represented the 13th advance in the 14 months following the
pandemic crash.
But since June, the manufacturing sector, which contributes
about 11% of total U.S. GDP, would appear to have lost some
steam.
Monday's PMI report from the Institute for Supply Management
showed the manufacturing sector's expansion gave up some
momentum in July.
This underscores not only ongoing supply bottlenecks and
labor shortages, but also suggesting that, as the economy
re-opens and social distancing restrictions are lifted, demand
is pivoting away from goods back to customer-facing services.
Wall Street was in a mixed mood by late morning trading.
Healthcare and staples lifted the Dow into positive
territory, but weakness in market-leading megacaps pulled the
S&P and the Nasdaq into the red.
Cyclicals and transports took a healthy lead.
(Stephen Culp)
*****
QUICK FADE (1004 EDT/1404 GMT)
Modest gains at the open on Wall Street on Tuesday were
quickly erased, with a defensive tone once again setting in, as
utilities are poised to lead sector gains for the
second straight session, while the yield on the U.S. 10-year
Treasury continues to trend lower.
Stocks briefly pared losses on the heels of June's durable
goods and factory orders data, but concerns about the Delta
variant continue to dent sentiment. The CBOE volatility index
reached an intraday high of 20.44, matching its high from
July 27.
In addition, St. Louis Federal Reserve president James
Bullard struck a hawkish tone, saying the pandemic may have sent
the U.S. into a period of stronger growth and better
productivity, but also one with higher interest rates and faster
inflation as investors continue to gauge when the Fed will begin
to alter its policy path.
Below is your market snapshot:
(Chuck Mikolajczak)
*****
DOES BUFFETT'S BERKSHIRE HAVE VALUE AS A LEADING INDICATOR?
(0900 EDT/1300 GMT)
Multi-national conglomerate Berkshire Hathaway
, helmed by famed value investor Warren Buffett, may
also have value as a leading indicator when assessing its
relative strength vs the SPDR Dow Jones ETF Trust.
Just looking back to 2015, intermediate-term
non-confirmations between the BRKb/DIA ratio and the Dow Jones
Industrial Average, have coincided with important DJI
peaks:
Indeed, the four most significant DJI sell offs from record
high territory over this period, ranging from 12% to 37%, were
all preceded by BRKb/DIA ratio divergence.
More recently, the ratio peaked on May 14, and it has since
deteriorated sharply. BRKb is down around 6% from its May 10
record intraday high and around 5% from its June 4 record close.
The DJI is down less than 1% from its July 26 record close and
1% from its record intraday high just set on Monday.
Timing may be blunt, but for whatever reason, given BRKb's
recent, and pronounced, underperformance vs the DIA, the clock
may be ticking on the same sort of bearish set up that attended
other significant DJI tops over the past 6 years or so.
(Terence Gabriel)
*****
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)