Wall Street edges higher as earnings season kicks off

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Wall Street stocks inched higher on Tuesday, as investors assessed an opening foray in a quarterly earnings season that will guide them on the pace of the US economic recovery.

The S&P 500 was up 0.5 per cent at lunchtime in New York as gains for energy stocks offset a mixed start to earnings season for the Wall Street banks. The tech-weighted Nasdaq was up about 0.2 per cent.

Wells Fargo slashed its dividend by 80 per cent after sinking to a $2.4bn loss, while Citi said its net income for the second quarter came in at $1.3bn, down 73 per cent from the year before, citing a “deterioration” in the economic outlook. JPMorgan warned of “significant uncertainty” ahead and revealed almost $10.5bn of loan loss provisions in the second quarter.

“Equities are navigating through a zone of uncertainty, because earnings visibility remains elusive and fresh spikes of Covid-19 are occurring in the majority of US states, delaying and even rolling back economic reopening,” said Terry Sandven, chief equity strategist at the wealth management unit of Minnesota-based US Bank.

Europe caught up on Tuesday with Wall Street’s late losses a day earlier, with the continent-wide Stoxx 600 and Frankfurt’s Xetra Dax both shedding 0.8 per cent. London’s FTSE 100 ended little changed.

Investors are bracing themselves for a grim US earnings season, with S&P 500 companies expected to report a 45 per cent plunge in quarterly profits. That would be the biggest drop since the depths of the 2008-2009 financial crisis.

Elizabeth Geoghegan, fixed income portfolio manager at Mediolanum, said it was notable that stock markets had risen so high while the yield on US 10-year Treasuries had been depressed. Typically, low medium-term bond yields point to muted expectations for future economic growth.

On Tuesday, the 10-year Treasury yield slipped a further 0.03 percentage points to come close to 0.6 per cent, as investor demand for the haven asset remained strong.

“It is a sign of how cautious investors are about this rally — they are participating in this uptick but they’re not willing to let go of their haven Treasury assets,” she said.

The muted activity on Tuesday follows a turbulent session in New York on Monday when the S&P 500 ended almost 1 per cent lower after briefly crossing into positive territory for the year.

That decline was spurred in part by California’s decision to join Texas and Arizona in rolling back its economic reopening. Gavin Newsom, governor of the most populous US state, ordered the closure of bars, cinemas and dine-in restaurants in an effort to contain a sharp rise in Covid-19 cases and hospitalisations.

The Cboe’s Vix index of S&P 500 volatility, known as Wall Street’s fear gauge, was elevated above 30 on Tuesday following the sharp declines.

The closely watched Bank of America survey for July revealed that fund managers viewed tech stocks — which fell sharply on Monday — as the best short position to hold, given their high valuations and stretched performance.
Chris Beckett, head of equity research at Quilter Cheviot, said that valuations of tech companies were reasonable, considering they had prospered from the shift towards working from home and ecommerce during the pandemic.

He added that outlooks provided by companies during earnings season would help direct stocks since investors already expected second-quarter results to be awful.

“We get better access to company management at a point where they feel more able to give a clear steer of what current trading looks like and what the future looks like.”

Equities in the Asia-Pacific region recorded broad losses. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks shed 1 per cent after the US vowed on Monday to adopt a tougher stance against China’s territorial claims in the South China Sea.

Offshore investors shifted out of Chinese stocks at a record pace with net sales of Rmb17.4bn ($2.5bn) via stock connect programmes between Hong Kong and mainland bourses on Tuesday, according to Financial Times calculations based on Bloomberg data.

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