US stocks slide to start the week as China COVID restrictions spark global growth fears

US stock futures stumbled on Monday as China COVID fears sparked fresh global growth concerns.

How stocks are trading
  • The Dow Jones Industrial Average DJIA,
    -0.35%
    fell 174 points or 0.6%, to 31,164.

  • The S&P 500 SPX,
    -0.97%
    shed 44 points, or 1.1%, to 3,856.

  • The Nasdaq Composite COMP,
    -1.85%
    was down 218 points, or 1.9%, at 11,417.

Major stock indexes rose last week, with the S&P 500 rising 1.9%, the Dow Jones Industrial Average up 0.8% and the Nasdaq Composite gaining 4.6%.

What’s driving markets

Investors started the week in a downbeat mood as a fresh flare-up of COVID-19 concerns in China added to the angst about prospects for the global economy.

Beijing imposed stringent restrictions across a number of cities this weekend in an effort to tackle the emergence of the highly contagious BA.5 Omicron sub-variant. China makes up more than a quarter of global manufacturing and any shutdown can hobble the world-wide supply chain, potentially causing further price spikes. The Shanghai Composite SHCOMP,
-1.27%
dropped 1.3%.

The fall in US equity index futures came after a 3% rebound for the S% P 500 last week when traders reasoned that the market’s recent drop to an 18-month low meant fears about inflation and slowing growth were factored in. A better-than-expected U.S. labor report, which showed a net 372,000 jobs added in June, also supported sentiment.

“On its face, the June employment report seems to support further aggressive Federal Reserve tightening, leading to higher US interest rates and a further appreciation of the dollar, and offsetting forces impacting US equities,” said David Kelly, chief global strategist at JP Morgan Funds, in a Monday note.

“However, there is a remarkable disconnect today between strong job growth and weakening final demand. This suggests that the economy could eventually stumble into recession, leading to a significant decline in inflation and a sharp, albeit temporary, drop in profits, ”Kelly wrote. It’s important for investors to avoid complacency on economic growth or despair about the still high inflation rate, he said.

“Most of all, investors should try to maintain a long-term focus on valuations and the financial environment that is likely to emerge when the current, very unusual, business cycle fades in favor of a more stable, although slow, growth path,” Kelly said.

The US second-quarter earnings season kicks into gear on Thursday, with JPMorgan Chase & Co. JPM,
-1.15%
leading the way for the banking sector. Investors will now be eager to see just how much rising prices have impacted corporate profitability.

“This is a very important season (aren’t they all) as the collapse in equities so far in 2022 is largely due to margin compression and not really earnings weakness,” said analysts at Deutsche Bank.

As of Friday, companies in the S&P 500 index were expected to report year-over-year earnings growth of 5.7% for the second quarter, according to IBES data from Refinitiv, which would be the slowest since the fourth quarter of 2020 during the pandemic . The expectations are skewed, however, by expectations for year-over-year growth of 239.1% for the energy sector. Excluding energy, earnings are expected to contract by 3%, the data show. Full-year earnings are expected to see a rise of 9.4% but 3.8% excluding energy.

Read: Will earnings season trigger another leg lower for the Dow? Investors hunt for recession clues

Stephen Innes, managing partner at SPI Asset Management, said the market will be focused on company guidance for coming quarters, and the post-earnings reactions will dictate the broader market risk appetite.

“While bears still see 10-15% more S&P 500 downside, increasing sympathy for a bull case is emerging (or at least a bear squeeze). We are already amid a shallow slowdown, which may be the best-case scenario for risk, ”he said.

Need to Know: If this stock market is shaping up like 2008, here’s where we could be headed next, says strategist

Companies in focus
  • Twitter Inc. TWTR shares fell 6.3% after Elon Musk late Friday said he was withdrawing his bid for the social-media platform. The company said it would try to enforce the $ 44 billion buyout.

  • Shares of casino operators with operations in Macau were under pressure Monday after Macau city officials said casinos there would be shut down for a week to fight a COVID-19 surge. Shares of Wynn Resorts Ltd.
    WYNN,
    -9.34%
    dropped 6.9%, Las Vegas Sands Corp.
    LVS,
    -9.16%
    slumped 7.1% and Melco Resorts & Entertainment Ltd.
    MLCO,
    -12.54%
    shed 8.8%. Wynn and Las Vegas Sands had more revenue from Macau than Las Vegas in 2021.

  • A report released on Sunday said Uber Technologies Inc.
    UBER,
    -4.07%
    lobbied political leaders to relax labor and taxi laws, used a “kill switch” to thwart regulators and law enforcement, and channeled money through Bermuda and other tax havens and considered portraying violence against its drivers as a way to gain public sympathy, as the company aggressively pushed into global markets. In a statement, Uber acknowledged “mistakes” in the past and said CEO Dara Khosrowshahi, hired in 2017, had been tasked with transforming every aspect of how Uber operates. Uber shares fell 2%. Uber shares fell 3.2%.

  • Moderna Inc.
    MRNA,
    -0.05%
    said Monday that a bivalent COVID-19 booster that equally protects against BA.1 and the original strain of the virus produced a better antibody response against the BA.4 and BA.5 subvariants in people who were fully vaccinated and boosted than its currently authorized COVID-19 booster. Modern shares were down 2.7%.

Other markets
  • Waning risk appetite helped push investors into Treasurys, nudging 10-year bond yields BX: TMUBMUSD10Y down 4 basis points to 3.060%, and boosted the dollar. The DXY DXY index rose 0.5% to 107.53 to flirt with 19-year highs.

  • WTI crude CL.1,
    -1.91%
    fell 2.3% to $ 102.44 a barrel as economic slowdown worries reverberated.

  • Gold GC00,
    -0.30%
    fell 0.4% to trade below $ 1,735 an ounce and Bitcoin BTCUSD,
    -2.78%
    lost 1.9% to $ 20,450.

  • The Stoxx Europe 600 SXXP,
    -0.44%
    fell 0.5%, while London’s FTSE 100 UKX,
    + 0.04%
    edged down 0.1%.

  • The Hang Seng HK: HSI in Hong Kong slumped 2.9% after China imposed big fines on Tencent HK: 700 and Alibaba HK: 9988 for not complying with disclosure rules. Japan’s Nikkei 225 JP: NIK bucked the regional trend, adding 1.1% after the country’s ruling coalition expanded its majority in upper house elections.

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