Morning Wrap: ASX 200 to fall, S&P 500 fades on bank downgrades + Is a short-term bounce at play?

The S&P 500 and Dow give back early strength as S&P Global joins Moody's in downgrading US bank ratings, US lawmakers have until 30 September before the government runs out of funding, Macy's misses earnings expectations and flags a rise in credit card delinquencies and the state of play for current market conditions.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 falls from positive start (Source: TradingView)

MARKETS

• S&P 500 lower and finished near worst levels from session highs of 0.43%

• A relatively uneventful session with Treasury yields slightly higher, commodities mixed

• Disappointing retail earnings renewed concerns about rising credit delinquencies and upcoming student loan repayments

• Treasury yields hit highest level since 2007 elevated rate fears (Bloomberg)

• T-Bill yields to climb further with foreign money steering clear (Bloomberg)

• Soaring US yields cast shadow over risk asset rally (Reuters)

• Strategists see dip-buying opportunity arising from pullback (Bloomberg)

• S&P join's Moody's in cutting US bank ratings (Bloomberg)

• US lawmakers have 12 legislative sessions before government funding expires on 30 September, raising likelihood of a potential shutdown (Washington Post)

• CEOs talk up AI in earnings calls but not in official filings (FT)

STOCKS & EARNINGS

• Microsoft concludes Activision Cloud streaming rights to Ubisoft (Bloomberg)

• Nvidia earnings will be major test for AI demand and market rally (Reuters)

• Nvidia on one of the strongest runs into earnings in past three years (link)

• Charles Schwab sells US$2.4bn bond amid job and real estate cuts (Bloomberg)

Lowe’s (+3.75%): Earnings beat but slight revenue miss, reiterated full-year guidance that expects comparable sales to fell 2-4%, management warned that waning consumer confidence is leading to softening discretionary sales.

• “When you look at consumer sentiment, we noted that we’re seeing a pullback in DIY discretionary spend.” – CEO Marvin Ellison

• “[Consumers] feel good about the amount of equity in their home and they know that there are projects they’re going to have to get done, but they’re just kind of waiting to see what’s going to happen in the macro environment.”

Macy’s (-14.0%): Double beat, second quarter sales fell 8% year-on-year, reiterated cautious full-year guidance, expects comparable sales to fall 6% to 7.5% in 2023. 

• "We experienced an increased rate of delinquencies within the credit card portfolio across all stages of age balances … the speed at which the increase occurred for us and the broader credit card industry since our Q1  earnings call was faster than planned.” – CFO Adrian V. Mitchell 

Dick’s Sporting Goods (-24.2%): Double miss, quarterly profits fell 23%, downgraded its full-year guidance amid an uptick in retail theft and aggressive markdowns.

• “Organised retail crime and theft in general is an increasingly serious issue impacting many retailers.” – CEO Lauren Hobart   

CHINA

• Sudden rally in China stocks has traders scratching their heads (Bloomberg)

• China's rate caution shines light on $56tn banking system (FT)

ECONOMY

• Half a million US jobs at risk of vanishing in payroll revision (Bloomberg)

Deeper Dive: The State of Play

The market is working its way through a bit of a correction and that's allowed for bit of a reset in sentiment and positioning dynamics, which can act as ammo for upside, should market conditions improve.

"The Short-Term Equity Sentiment signal rapidly crashed over the last 2 weeks, indicating a potential short-term technical bounce in the market is near; however, the Long-term Equity Sentiment signal is still in the process of rolling over," notes JPMorgan analysts.

The signal has hit levels not seen since October and May 2022. Both of which coincided with short-term bounces for the S&P 500. At the same time, a short-term technical bounce is ... well ... just a short-term technical bounce.

A separate note from Morgan Stanley says this risk-off mood will likely "persist for at least a few more weeks and possibly into the fall or winter if fundamentals deteriorate ... [we] look to the S&P 500 200-day moving average as minimum downside."

For context, the 200-day is about 4-5% below current levels.

One of the key moving parts to current fundamentals are yields. The US 10-year Treasury yield is trading at levels not seen since late 2007.

Last year, the 10-year peaked at 4.3% in October (the S&P 500 is trading almost 25% higher than last October levels) before falling to around 3.3% by April 2023. So what happens from here if growth continues to surprise to the upside while the labour market remains tight?

For now, the likelihood of another 25 bp hike from the Fed in September sits at just 13%. However, the probability of a November hike is a little over 40%. For more guidance, we turn to Powell's comments at Jackson Hole on Thursday/Friday.

ASX corporate actions occurring today:

• Trading ex-div: Downer (DOW) – $0.08, Domain (DHG) – $0.04, Mystate (MYS) – $0.115, Magellan (MFG) – $0.698, FSA Group (FSA) – $0.035, AGL Energy (AGL) – $0.23, AMP (AMP) – $0.025

• Dividends paid: None

• Listing: CurveBeam AI (CVB) at 11:00 am 

Economic calendar (AEST):

• 9:00 am: Australia Manufacturing PMI

• 9:00 am: Australia Services PMI