Morning Brief: High Earnings Expectations, Harris Sees Polling Increase

Market Sentiments Waver Despite Earnings Season

Wall Street has recently shown high skepticism, even towards positive earnings reports. Reflecting on similar reactions to Netflix and TSMC last week, Alphabet's strong second-quarter performance still resulted in a 2% dip in its stock overnight. Notably, even the artificial intelligence push failed to draw enthusiasm. Tesla's situation was more comprehensible; its stock plummeted 8% post-market after the automaker reported a significant drop in profit margins—the lowest in over five years—due to price cuts and increased AI-related expenditures.

Mixed Outcomes Across the Board

As earnings season unfolds globally, mixed results from various companies are apparent. UPS shares tumbled 12%, contrasting sharply with Spotify, which surged the same percentage. In Europe, Deutsche Bank and BNP Paribas faced declines, with significant drops in their stock values. China's ongoing economic struggles extended their influence, notably affecting Europe's luxury sector; LVMH shares fell nearly 5% owing to lower-than-expected sales driven by reduced Chinese demand.

Euro Zone and U.S. Market Dynamics

European markets and the euro faced additional pressure from an unexpected contraction in overall euro zone business activity, as indicated by early July surveys. The U.S. equivalent will be released later on Wednesday. Amidst this, S&P500 futures are down 0.6% ahead of the opening bell, with major tech stocks leading the decline and broader economic concerns resurfacing, notably following another dismal home sales report.

Election Influence and Market Reactions

The political landscape further adds to market uncertainty. Vice President Kamala Harris, potentially succeeding Joe Biden in the upcoming presidential race, has seen her poll ratings surpass former President Donald Trump. This shift has impacted 'Trump trades', with markets perceiving Harris as maintaining the current administration’s economic policies. Bond markets reacted favorably to the equity volatility, growing concerns about economic growth, and a sharp drop in crude oil prices, which hit their lowest levels in over a month.

Global Financial Movements

The decline in oil prices—down nearly 7% over the past week—played a role in inflation calculations, turning negative again for the first time since March. The recent 2-year Treasury note auction garnered good investor demand, resulting in a decline in two-year yields to 4.43%, with more 5-year notes expected to be auctioned later today. Meanwhile, the Canadian dollar weakened to its lowest since April, amid expectations that the Bank of Canada would cut its main policy rate once again.

Asian markets mostly saw declines, particularly Chinese and Hong Kong stocks. A slightly stronger dollar index was balanced by a notable drop in the dollar/yen pair, which hit its lowest since May due to speculation on another potential interest rate hike by the Bank of Japan and ongoing currency interventions. The Bank of Japan's policy review next week is anticipated to provide further direction.

Key Developments on the Horizon

Upcoming events expected to influence U.S. markets later on Wednesday include:

US flash business surveys for July from S&P Global. June new home sales, trade balance, and wholesale and retail inventories data. Bank of Canada's policy decision. US corporate earnings from companies like AT&T, IBM, Ford, and many others. Speeches from Dallas Federal Reserve President Lorie Logan and European Central Bank chief economist Philip Lane. US Treasury's sale of $70 billion in 5-year notes and auction of 2-year floating rate notes.