Morning Wrap: Walmart and Home Depot earnings power the S&P 500 higher, ASX to rise

The S&P 500 and Dow extend gains thanks to strong earnings from Walmart and Home Depot, a recession in Germany is becoming ‘almost inevitable’ and what does history say about a new bull market versus a bear market rally? 

Let’s dive in.

MARKETS

The Nasdaq closed -0.19% lower, truly devastating. I can’t believe the market had a red day after an almost 25% rally in just two months. The blue-chip Dow and S&P 500 powered ahead thanks to upbeat earnings from Walmart and Home Depot - whose results were anything but recessionary. 

The market has shown so much strength that it’s becoming increasingly difficult to say whether we’re in a new bull market or a bear-market rally. The percentage of S&P 500 companies trading above their 50-day moving average has jumped from almost 0% in late June to 88%.

“On the surface, the recent thrust to 88% seems in line with new bull markets. But it’s also consistent with bear-market rallies,” said Jurrien Timmer, Director of Global Macro at Fidelity. Though, Timmer notes that bear market rallies typically retrace no more than 50% of its losses, except for the rally off the post-WWII bear market in 1946.

“So, on a historical basis, if this rally advances much further, it will be hard to conclude that this is not a new bull market. This is one of the few technical clues out there. If this is a bear-market rally, it likely has gone about as far as it will go,” he added.

Anyway, onto the usual stuff. 

• Dow Jones and S&P 500 fell -0.2% and -0.5% respectively in early trade but managed to recoup those losses

• 6 out of 11 US sectors higher

• Staples and Discretionary both rallied more than 1%

• Real Estate, Energy, Tech and Healthcare underperformed

• 49% of US stocks advanced 

• 43% of US stocks trade below their 200-day moving average (44% on Tuesday, 55% a week ago) 

STOCKS

• Bed Bath & Beyond (+29.1%) shares continue to rocket as retail traders piled into the meme stock. The stock was hit with several trading halts due to volatility and briefly rallied as much as 78% in the overnight session.

• Walmart (+5.1%) posted better-than-expected earnings, with sales up 8% to US$152.9bn. Profits tightened as consumers turned to lower margin grocery and essentials segments

  • Walmart CEO: “As we moved through Q2, food inflation continued to tick up and we continued to see a heavier mix of sales in food and consumables in many of our markets and that put pressure on margins overall.”

  • “I’d say that what we’re seeing is they (the US consumer) are relatively healthy … there’s a trade down in both quality and quantity. So instead of buying deli meats, we’re seeing things like canned tuna and chicken and even beans, as units were up over 25% in the quarter. They’re buying smaller pack sizes to save money. We’ve seen an increase in the private brands growth effect, it’s 2x for food what it was in the first quarter.” 

• Home Depot (+4.1%) second-quarter earnings and revenue beat analyst expectations amid continued strength in demand for home improvement projects

  • Home Depot CEO: “We see engaged & resilient homeowners who have strong balance sheets, consumers spending more time in their homes and continued structural support for home improvement project demand … We will continue to manage with flexibility through a dynamic environment.”

• Zoom (-3.6%) shares tanked after Citi downgraded the stock to a Sell. The analysts warned that growing competition from rival Microsoft Teams could push the stock down -20%

EARNINGS

US corporate earnings we’re watching this week:

• Wed: Tencent, Lowe’s, Target, Cisco, Amcor

• Thur: Weibo, Estee Lauder

• Fri: John Deere, Footlocker 

ECONOMY

• German ZEW economic sentiment index worsens to -55.3 in August from -53.8 in July

  • Index is now below covid levels

  • Tells us that financial market participants think that Europe is on the brink of a GFC-like sovereign-debt crisis

  • “August ZEW reading only adds to the bad news out of Germany. The long list of risks and challenges the German economy is facing makes a recession in the second half of the year almost inevitable,” said ING

• Canadian inflation eased to 7.6% in July from 8.1% in June

  • The CPI print was in-line with economist expectations

  • Gasoline prices were up 35.6% year-on-year in July versus 54.6% in June

  • Cost of food and services such as travel and dining out continued to climb

  • The Bank of Canada governor said the annual rate has peaked but expects prices to “remain too high for some time.” 

• US housing starts fell -9.6% to an annual rate of 1.446m units in July, the lowest level since February 2021

  • Surging mortgage rates, high construction material prices and long lead times weighed

COMMODITIES

• Iron ore futures fell -0.15% to US$106 a tonne. Some interesting quotes from BHP’s FY22 results: 

  • “Looking ahead, the key near-term uncertainties are the pace of steel end-use sector recovery in China, how the Chinese authorities will administer steel production cuts in the remainder of the CY2022, and the performance of seaborne supply.”

  • “In the medium term, China’s demand for iron ore is expected to be lower than it is today as crude steel production plateaus, and the scrap-to-steel ratio rises.”

  • “In the medium term, China’s demand for iron ore is expected to be lower than it is today as crude steel production plateaus, and the scrap-to-steel ratio rises.”

• Oil briefly rallied 3% before finishing the overnight session in red. Prices are deteriorating amid fears that China’s economy could slow even more and a potential breakthrough for the US-Iran nuclear deal, which would flood the market with new oil supply

• Gold is back to struggling as equity markets grind higher. The US dollar and Treasury yields are also inching higher

Not the most exciting overnight session. The Nasdaq is showing some signs of fatigue, with ETFs like FinTech and Cloud down -0.44% and -0.97% respectively.

On a side note, the Evening Wrap should see its debut on Thursday.

After that, I'm hoping to make a few tweaks to the Morning Wrap, mostly centered around adding links or link off to a page to give you guys better visibility of the ETFs above.

#1 Uranium

The Global X Uranium ETF was quick to reject a rally into the 200-day moving average on 8 and 11 August. The ETF has managed to stabilise after the market's broad-based selloff in April, May and June but it still remains somewhat trendless.

The Wall Street Journal reported Germany's plans to keep its last three nuclear power plants running in a policy U-turn. Until March 2011, Germany obtained one quarter of its electricity from nuclear, with 17 reactor.

Surprisingly, a German ministry spokesperson said the media report "lacks any factual basis."

So nothing too major for uranium stocks. More a 'watch this space' as Europe faces an energy crisis like no other.

Global X Uranium ETF chart (Source: TradingView)

#2 Lithium

The VanEck Rare Earth/Strategic Metals ETF fell -2.35%. This was unsurprising given the broad-based weakness across most ASX-listed lithium names on Tuesday. We're starting to see some names begin to cool off after a V-shaped move, especially Core Lithium (ASX: CXO).

Now, the question is how do these stocks behave when they pullback? Will there be a tiny pullback and they continue to rip higher? Will they find support somewhere, like the 20-day moving average and consolidate? Or will it be ugly and volatile?

Stocks going ex-dividend:

• Wed: CBA, FSA, RMD

• Thur: GPT, IAG, KOV, MYS, QBE

• Fri: BWP, CD3, CMW, NEW

• Mon: AZJ

• Tue: ACL

ASX corporate actions occurring today:

• Dividends paid: MIR

• Listing: None

• Issued shares: ARR, AZL, BCN, BMN, CPH, CSR, DBF, ENX, KMD, MGF, MKL, NAB, NBI, PGD, PRU, RNU, SHA, STA, TIE, XRO

Other things of interest (AEST): 

• UK Inflation Rate (July) at 4:00 pm

• Eurozone GDP Growth Rate (Q2) at 7:00 pm

• US Retail Sales (July) at 10:30 pm