U.S. stocks lose ground as China stirs global slowdown fears

What’s driving markets

Disappointing economic news out of China helped set the negative tone, with retail sales, investment and industrial output all slowing and missing forecasts. China’s central bank trimmed lending rates.

“Bad data from China also weighs on recession worries for the rest of the world,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank in a note.

Also, the New York Fed’s Empire State business conditions index, a gauge of manufacturing activity in the state, plummeted 42.4 points to negative 31.3 in August, the regional Fed bank said Monday.

The figure didn’t help sentiment, though economists were taking it with a grain of salt.

The Empire State data “wasn’t entirely bad: delivery times were steady for the first time in almost two years, employment managed to rise, and inflation pressures did not increase,” said Oren Klachkin, lead U.S. economist at Oxford Economics, in a note.

“At the same time, manufacturers were not cheerful about the outlook for the next six months. We caution not to take too much away from this report since N.Y. manufacturing constitutes a small portion of the country’s manufacturing base,” he wrote.

Concerns about slower demand from China pressured the energy sector, with WTI crude oil futures CL.1 dropping 5.3% to trade near $87 a barrel. The Energy Select Sector SPDR ETF
XLE,
-3.82%
fell 3.7%.

Stocks were struggling to maintain upward momentum after a strong run that saw the S&P 500 record a four-week winning streak that delivered its best percentage advance for such a period since November 2020.

Similarly, the tech-heavy Nasdaq Composite sits near a four-month high after surging 22.6% off its mid-June low.

“That run of gains has been turbocharged over the last couple of weeks by a number of good news stories that have fed into a narrative about whether we might have seen ‘peak inflation’ now, raising hopes that central banks might not need to be as aggressive as feared about raising rates,” said strategists at Deutsche Bank in a note to clients.

Technical indicators speak to the improved tone of late. The CBOE Volatility index
VIX,
+5.99%,
a gauge of expected market volatility that usually rises when investors are fearful, closed last week below its long-term average of 20. However, the VIX, as it’s also known, was up 6.2% to 20.74 on Monday.

See: Can the stock market bottom without Wall Street’s fear gauge hitting ‘panic’ levels?

The breadth of the market’s latest bounce is also considered supportive, with Bespoke Investment noting the percentage of S&P 500 stocks trading above their 50-day moving average has jumped to 88% from just 2% on June 16th.

Also Friday, the S&P 500 closed above 4,231, marking a retracement of more than 50% of the 2022 selloff from its Jan. 3 record close to the June 16 low. Technical analysts noted that the S&P 500 in the past half-century hasn’t retraced 50% of a bear-market selloff and then went on to set new cycle lows, though they warned that there was still potential for sharp losses and near-term volatility.

Read: Why stock market bulls are applauding the S&P 500’s close above 4,231

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said she remained “constructive on U.S.equities through year-end 2022 and think it’s possible that U.S. equities saw their low in mid June.”

But she was concerned that the need to trim earnings per share forecasts will pressure stocks and this will place great emphasis on the third quarter earnings season when companies will have difficulty with earnings visibility for 2023.

“This makes it challenging to assess valuations today…..We don’t rule out the possibility that conditions will turn choppy again in the months ahead and see some risk that the S&P 500 will retest its year-to-date low again in late 3Q/early 4Q,” Calvasina said.

Companies in focus

• Shares of Bed Bath & Beyond Inc.
  BBBY,
  +10.81%
  rose 4.4%, putting the meme stock on track for a fourth-straight gain. The stock had run up 21.8% on Friday, and had soared 32.3% since it fell 14.2% on Aug. 9 to snap the longest win streak in 15 years. The home good retailer’s meme stock is headed for the 13th gain in 14 sessions.

How are other assets faring

• The 10-year Treasury yield
  TMUBMUSD10Y,
  2.773%
  fell 8.4 basis points to 2.764%.

• The ICE Dollar index
  DXY,
  +0.51%
  rose 0.4%, and the stronger buck helped push gold
  GC00,
  -1.23%
  down 1.2% to trade below $1,793 an ounce.

• Bitcoin
  BTCUSD,
  -0.65%
  rose above $25,000 for the first time since June, but then reversed, dropping 1.2% to $24,050.

• In Europe, the Stoxx 600
  SXXP,
  +0.09%
  rose 0.1%, while London’s FTSE 100
  UKX,
  -0.18%
  was down 0.2%.

• In Asia, the Shanghai Composite
  SHCOMP,
  -0.02%
  ended fractionally lower, while the Hang Seng Index
  HSI,
  -0.67%
  fell 0.7% in Hong Kong and Japan’s Nikkei 225
  NIK,
  +1.14%
  advanced 1.1%.

Hear from Carl Icahn at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The legendary trader will reveal his view on this year’s wild market ride.