Premarket: Summer equity rally could produce more pain

What’s Happening: The S&P 500 was up more than 9% in July, the best month since November 2020. The hope among investors was that the Federal Reserve could begin to calm down, reducing the risk of aggressive rate hikes. central bank interest could turn the US economy into a recession this year or next.

But it’s hard to find real excitement for pop. Many traders interpret gains as a “bear market rally” or a short-lived rise within a broader dip.

“We think the market may have been too smug too soon for recession risks to fade,” Goldman Sachs strategists told clients this week. “We think the markets will be vulnerable to hawkish surprises.”

If the stocks start to suffer heavy losses again, it could be painful. This is because many investors have kept their money in the market despite recent volatility.

“We haven’t seen large-scale outflows,” Karim Chedid, head of investment strategy for BlackRock’s iShares business in Europe, the Middle East and Africa, told me. “There is still money in the shares.”

The big reason investors haven’t dumped the shares is because they entered 2022 with high levels of liquidity, according to Chedid. As inflation increases, diluting the value of that money, they are not anxious to hold more. And so far, the interesting alternatives have been limited.

“It means the pain trade is down,” Chedid said. In other words, those who still have the skin in play could be hammered.

You know this phrase: strategists have been waiting for a moment known as “capitulation”, when losses become too brutal to bear further and even the most reluctant traders are heading for the exit. It often means that the minimum of a clearance sale could be close.

Fund flow data subvert the idea that capitulation has already arrived. There is still a lot of exposure, which means market whims could induce more misery.

It can be hard to find full-throated bulls right now, but not everyone is totally cynical.

“Although the business outlook remains challenging, we believe the risk-reward ratio for equities is more attractive as we move. [the second half of the year]”Marko Kolanovic of JPMorgan Chase told clients this week, noting that valuations relative to future earnings look attractive.

However, Bank of America’s Savita Subramanian notes that many companies are still not cutting earnings estimates even as economic growth slows. This represents a serious vulnerability should conditions deteriorate rapidly.

Pelosi’s visit to Taiwan shakes up the markets

On Tuesday, US House Speaker Nancy Pelosi’s expected visit to Taiwan rocked Asian markets as investors showed concern that the trip could exacerbate tensions between the world’s two largest economies.

Nancy Pelosi's plan to visit Taiwan causes Chinese markets to collapse

The latest: Hong Kong’s Hang Seng Index fell 2.4%, reports my CNN business colleague Laura He. Mainland China’s Shanghai Composite closed 2.3% lower. Taiwan’s Taiex closed 1.6% lower.

The Taiwan dollar weakened by 0.1% against the US dollar. Meanwhile, the Japanese yen, a traditional safe haven currency, rose 0.6% against the greenback.

Investors have also bought US government bonds, which are considered a safe bet.

Step Back: According to a senior Taiwanese government official and a US official, Pelosi is expected to visit Taiwan as part of her Asia tour.

The decision comes despite warnings from Biden administration officials, concerned about China’s response to such a high-profile visit. The Speaker of the House, who comes second in line to the presidency after the vice president, hasn’t visited Taiwan in 25 years.

“Neither side wants a real war, but the risk of an accident or even an aggressive escalation of the war game is real, which could always lead to a tactical error,” Stephen Innes, managing partner of SPI Asset, told clients. Management.

The long journey towards the normal supply chains

In a recent edition of Before the Bell, I wrote about how global supply chains are showing signs of improvement, a development that could ultimately push down decades-high inflation.

But I have noticed that the timeline for a return to normal conditions is still anyone’s guess, a thesis supported by Maersk’s latest guidance for investors.

The container shipping giant raised its annual profit forecast on Tuesday. It now expects earnings of $ 37 billion, up from $ 30 billion previously.

The rationale: “Congestion in global supply chains leading to higher transport rates has continued longer than initially anticipated.”

Maersk said he now expects a “gradual normalization” of sea freight transport in the last quarter of this year. In May, the company expected that process to take place “early” in the second half of 2022.

My takeaway: The cost of shipping a 40-foot container continues to drop, which is good news. But it is difficult to put too many stocks in the timelines, which have been delayed again and again. And the maritime sector remains at the mercy of a myriad of variables, from Covid-19 and the war in Europe to an uncertain economic environment.

“In view of the war in Ukraine, the continuing disruption of global supply chains and the effects of the Covid-19 pandemic, forecasts are subject to considerable uncertainty,” said Maersk rival Hapag-Lloyd when he raised his annual profit forecast last week.

Next next

Ferrari (COMPETITION), caterpillar (CAT), JetBlue Airways (JBLU), Marriot (MAR) And Uber (UBER) report results before US markets open. Airbnb, Match group (MTCH), PayPal (PYPL) And Starbucks (SBUX) follow after closing.

Also today: US job openings data for June posts at 10am ET.

Coming tomorrow: I earn from Modern (MRNA), Clorox (CLX) and Robinhood.
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