U.S equity futures are pointing higher after dropping last week. The decline of -1.3% for the S&P 500 (still +16.1% YTD) was in line with historic norms for early September. Industrials, -2.9%, and materials, -2.4%, led the declines. We would not be surprised to see a bounce this week into option expiration Friday. But Interest rates remain under pressure with the 10-year yield up another few basis points to 4.29% after rising 8 bps last week. Oil prices are slipping below $87 following last week’s climb on news of extended output cuts by Saudi Arabia and Russia. The S&P 500 ended Friday’s at 4,457, down from last Friday’s closing level of 4,515.
For once, there are no Fed speakers this week due to the blackout period ahead of the September 19-20 policy meeting. The WSJ ran an article over the weekend that suggests the FOMC is leaning not just toward a rate-hike ‘skip’ next week but a possible extended pause for the rest of the year. This would mirror Alan Greenspan in 1999 and be bullish for the markets post 3rd quarter EPS reports in October. Many members, including Chair Powel, believe risks between under-and over-tightening has moved into better balance.
The U.S. economy faces a couple of roadblocks in the weeks ahead. First, another possible partial government shutdown starting October 1 and second an auto workers strike starting Thursday evening. Auto manufacturing and retail account for about 3% of U.S. industry GDP. Economic losses are estimated at $5.6 billion, based on lost wages and profits in the industry plus multiplier effects.
Oil prices resumed their upward move, having risen from the mid-60s to $87/bbl since the end of June. U.S. crude inventories fell sharply again while Russia and Saudi Arabia extended voluntary supply cuts to year-end. U.S. gasoline prices are creeping toward $4/gallon. OPEC+ appears confident the U.S. will be unable to again employ the Strategic Petroleum Reserve (SPR), which under President Biden has seen its supplies halved in under 18 months.
Last week, cyclical stocks fell as the U.S. dollar strengthened. Energy stocks led gains as OPEC+ continues to support oil prices. The Russell 2000 dropped -3.61% and touched a 21-year low relative to the S&P 500. Similar performance was seen in 1999 mid “Internet Bubble”, just before both absolute and relative performance turned higher in small cap stocks. Apple fell -6% amid growing bans on iPhone usage for Chinese government employees. Apple is set to unveil its iPhone 15 this week. Stocks in Europe and EM fell, down -1.53% and -1.20%, respectively.
The industrial sector declines were led by Rollins (ROL), whose shares fell -8.3% on the week as a secondary stock offering priced at $35 per share, an 8% discount to the stock’s prior closing price.
In the materials sector, shares of FMC Corp. (FMC) lost -12% amid a short-seller report that the agricultural sciences company disputed. As previously mentioned, Apple (AAPL) shares weighed on the technology sector, falling almost -6%, amid reports that China ordered officials at central government agencies not to bring iPhones into the office or use them for work. The energy sector’s gains included shares of Marathon Petroleum (MPC), which rose +6.4% as analysts at Goldman Sachs, UBS and Wells Fargo raised their price targets on the stock.
Major earnings scheduled for this week include Oracle (ORCL), Adobe (ADBE), and Lennar (LEN).
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