The stock market was falling Tuesday as investors fretted about issues including inflation and pressures on quarterly earnings, while Chinese stocks slipped amid a report on President Xi Jinping’s plan to overhaul the country’s financial system.
Futures for the Dow Jones Industrial Average indicated an open 130 points lower, after the index fell 250 points Monday to close at 34,496. The S&P 500 and Nasdaq were poised for a similar start Tuesday. After bond markets were closed Monday, the yield on the benchmark 10-year Treasury note was down slightly Tuesday but remains elevated from recent levels at 1.6%.
Concerns center around familiar themes, including inflation, supply-chain pressures, and the future of central bank stimulus, such as the Federal Reserve beginning to slow, or taper, its program of monthly asset purchases, expected in November.
The next major catalyst for markets is expected to be the coming earnings season, which begins in earnest when major U.S. banks report results later this week. Investors will closely watch bank outlooks for 2022, and, beyond the financial services sector, how rising costs and supply-chain issues could weigh on corporate profits.
“The quarterly earnings season, which starts this week, has equity markets on edge over whether profit forecasts will be tempered for 2022 given the rich valuations prevalent in stocks everywhere,” said Jeffrey Halley, an analyst at broker Oanda. “Add in the creeping, but relentless implications of the Fed taper and it is no surprise that equity markets remain on edge.”
That being said, jitters over earnings could leave space for strong bullish sentiment to return if company profits beat analyst estimates.
“Expectations for third-quarter earnings have been coming down in recent weeks and that should create some room for upside surprises, which is good for overall market sentiment,” said Rod von Lipsey, a managing director at UBS Private Wealth Management.
The latest fuel for inflation fears has been rising commodity prices, with U.S. crude—West Texas Intermediate oil futures—closing at seven-year highs above $80 a barrel Monday. WTI was down slightly Tuesday, but holding steady around $80.40, while futures for international benchmark Brent were up slightly to around $83.70.
“Another round of commodity price rises [is] making it increasingly difficult for central banks to argue that inflation is in fact proving transitory,” said Jim Reid, a strategist at Deutsche Bank.
Overseas, Hong Kong’s Hang Seng Index fell 1.7%.
Chinese stocks were under pressure following a report from The Wall Street Journal zeroing in on Xi’s plans to overhaul the country’s financial system. Xi wants the ruling party to do more to steer flows of money, set tighter rules for entrepreneurs and investors and their ability to make profits, and exercise even more control over the economy, the report said.
Sentiment in Hong Kong was also damped by an update in the saga over China Evergrande (3333.H.K.), the highly indebted property developer whose financial woes hang like a black cloud over the country’s real estate sector.
“There were signs of a worsening in the Evergrande debt situation, with the firm missing coupon payments on a 9.5% note due in 2022 and a 10% bond due in 2023,” Reid said.
The pan-European Stoxx 600 was 0.7% lower.
In the day ahead, markets will digest U.S. economic data in the form of the JOLTs job openings for August and the NFIB’s small business optimism index for September.
Here are five stocks on the move Tuesday
Broad market concerns and the Journal report have reversed a rally in Alibaba (BABA) stock, which had until Monday surged around 25% over the past five days. Shares in the internet giant were down 4.4% in Hong Kong. Peer Tencent (0700.H.K.) fell 2.9% in Hong Kong, with other tech companies including Baidu (BIDU) down 4% and JD.com (JD) declining 2.5%.
Shares in low-cost carrier EasyJet (EZJ.U.K.) fell 2.6% in London, after the airline forecast a £1.2 billion ($1.6 billion) loss this year.
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