Profit Taking May Lead To Extended Pullback On Wall Street

The major U.S. index futures are currently pointing to a moderately lower open on Tuesday, with stocks likely to extend the pullback seen late in Friday’s session.

Traders may continue to cash in on recent strength in the markets, which lifted the Nasdaq and the S&P 500 to their best levels in over a year last week.

Overall trading activity is likely to be somewhat subdued, however, as traders look ahead to congressional testimony by Federal Reserve Chair Jerome Powell.

Powell is due to testify before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday.

Traders are likely to pay close attention to Powell’s remarks, looking for additional clues about the outlook for interest rates.

Comments by a number of other Fed officials are also likely to attract attention in the coming days along with reports on weekly jobless claims and existing home sales.

Stocks turned in a lackluster performance throughout much of the trading session on Friday before coming under pressure in the latter part of the session. The major averages all moved to the downside, with the tech-heavy Nasdaq leading the way lower.

The major averages finished the session just off their worst levels of the day. The Nasdaq slid 93.25 points or 0.7 percent to 13,689.57, the S&P 500 fell 16.25 points or 0.4 percent to 4,409.59 and the Dow dipped 108.94 points or 0.3 percent to 34,299.12.

Despite the pullback on Wall Street, the major averages posted strong gains for the week. The Nasdaq spiked by 3.3 percent, the S&P 500 surged by 2.6 percent and the Dow jumped by 1.3 percent.

The late-day weakness on Wall Street partly reflected profit taking, as some traders looked to cash in on the recent strength in the markets.

The S&P 500 and the Nasdaq once again reached their best closing levels in over a year on Thursday, while the Dow set a new six-month closing high.

Following yesterday’s avalanche of data, the U.S. economic calendar is relatively quiet today, although the University of Michigan released a report showing a bigger than expected improvement in U.S. consumer sentiment in the month of June.

The University of Michigan said is consumer sentiment index climbed to 63.9 in June from 59.2 in May. Economists had expected in the index to inch up to 60.0.

The report also showed a significant decrease in year-ahead inflation expectations, which tumbled to 3.3 percent in June from 4.2 percent in May, hitting the lowest level since March 2021.

Five-year inflation expectations edged down to 3.0 percent in June from 3.1 percent in May, again staying within the narrow 2.9-3.1 percent range for 22 of the last 23 months.

The decrease in inflation expectations may add to recent investor optimism that the Federal Reserve won’t follow through on its plan to continue raising interest rates.

Software stocks showed a significant move back to the downside, with the Dow Jones U.S. Software Index falling by 1.3 percent after ending Thursday’s trading at its highest closing level in well over a year.

Considerable weakness also emerged among computer hardware stocks, as reflected by the 1.3 percent drop by the NYSE Arca Computer Hardware Index. The index also pulled back off a more than one-year closing high.

Retail, semiconductor and tobacco stocks also moved lower over the course of the session, while gold stocks moved notably higher amid a slight increase by the price of the precious metal.

Commodity, Currency Markets

Crude oil futures are falling $0.68 to $71.10 a barrel after jumping $1.16 to $71.78 a barrel last Friday. Meanwhile, after inching up $0.50 to $1,971.20 an ounce in the previous session, gold futures are slipping $6 to $1,965.20 an ounce.

On the currency front, the U.S. dollar is trading at 141.56 yen versus the 141.98 yen it fetched on Monday. Against the euro, the dollar is trading at $1.0917 compared to yesterday’s $1.0921.

Asia

Asian stocks ended mixed on Tuesday as Chinese growth concerns persisted and investors waited for further direction from Federal Reserve Chair Jerome Powell, who will testify before Congress on Wednesday. A cautious undertone prevailed due to a federal holiday in the U.S. on Monday.

The dollar traded higher after a meeting between Chinese leader Xi Jinping and U.S. Secretary of State Antony Blinken yielded no signs of progress from either side on a range of bilateral issues. However, both sides indicated a willingness to cooperate.

Gold held steady while oil prices dropped on concerns that China’s post-COVID recovery is faltering.

Chinese shares fell despite the country’s central bank cutting two key benchmark interest rates in a bid to counter the post-COVID growth slowdown in the world’s second-largest economy.

The People’s Bank of China cut two key policy rates, including a benchmark for corporate loans and another used to price mortgages by 10 basis points each, the first such reductions in 10 months.

China’s Shanghai Composite Index dropped 0.5 percent to 3,240.36, while Hong Kong’s Hang Seng Index tumbled 1.5 percent to 19,607.08.

Japanese shares recovered from an early slide to finish on a flat note after Warren Buffet’s Berkshire Hathaway raised its stake in five Japanese trading firms to an average of more than 8.5 percent.

The Nikkei 225 Index finished marginally higher at 33,388.91, while the broader Topix Index ended 0.3 percent lower at 2,283.85. Marubeni, Mitsui & Co. and Mitsubishi Corp. rallied 2-4 percent.

Seoul stocks ended slightly lower after China’s moderate rate cut and comments from some Fed officials backing the need for further interest rate hikes the year-end. The Kospi slipped 0.2 percent to 2,604.91, dragged down steel, energy and chemical stocks.

Australian markets rallied for the seventh consecutive session to reach a two-month high after minutes from the Reserve Bank of Australia’s June meeting showed that a decision to hike interest rates in June was “finely balanced.”

The benchmark S&P/ASX 200 Index climbed 0.9 percent to 7,357.80, marking its highest closing level since April 20. The broader All Ordinaries Index settled 0.8 percent higher at 7,548.50.

The big four banks rose between 0.8 percent and 1.7 percent. Woodside Energy Group jumped 2.2 percent after the company said it would develop the Trion oil project in the Gulf of Mexico at an estimated cost of $7.2 billion.

Across the Tasman, New Zealand’s benchmark S&P/NZX 50 Index rose 0.3 percent to 11,789.37. The government announced an enquiry into the banking sector amid concerns that lenders are making excessive profits.

Europe

European stocks are turning in a lackluster performance on Tuesday, as modest cuts in China’s loan prime rates have failed to inspire investors.

Investors are also awaiting cues from Fed Chair Jerome Powell’s congressional testimony and the Bank of England’s interest rate decision this week for clues on the monetary policy outlook.

In economic news, preliminary data from Destatis showed German producer price inflation eased for the eighth straight month in May to reach its lowest level in more than two years amid a fall in energy prices.

The producer price index climbed 1.0 percent year-over-year in May, slower than the 4.1 percent surge in April. Economists had forecast price growth to ease to 1.7 percent. The latest inflation rate was the slowest since January 2021, when prices had risen 0.9 percent.

Separate data from the European Central Bank revealed that the 20-nation bloc’s adjusted current account surplus fell to 4 billion euros in April from 31 billion euros a month earlier.

While the U.K.’s FTSE 100 Index is up by 0.1 percent, the French CAC 40 Index is down by 0.1 percent and the German DAX Index is down by 0.2 percent.

Carmaker Stellantis has moved notably lower after forming a 50-50 joint venture with iPhone assembler Foxconn to design and sell semiconductors for the automotive industry from 2026.

Braemar has also tumbled in London on news that Chief Financial Officer Nick Stone will step down on July 31.

Abrdn has also moved to the downside after selling its 2.18 crore shares in HDFC Asset Management Company.

Renault has also slumped. The French carmaker appointed its group chief executive Luca de Meo as the future chairman and CEO of Ampere.

German specialty chemicals company Lanxess has also plunged after cutting its second-quarter and full-year 2023 adjusted EBITDA guidance, citing weak demand.

Meanwhile, drug maker Sanofi has rallied. The International Chamber of Commerce ruled in the company’s favor in an arbitration case over claims by Boehringer Ingelheim in cancer lawsuits linked to heartburn drug Zantac in the United States.

U.S. Economic Reports

A report released by the Commerce Department on Tuesday showed new residential construction in the U.S. unexpectedly skyrocketed in the month of May.

The Commerce Department said housing starts soared by 21.7 percent to an annual rate of 1.631 million in May after tumbling by 2.9 percent to a revised rate of 1.340 million in April.

Economists had expected housing starts to edge down to a rate of 1.400 million from the 1.401 million originally reported for the previous month.

The report said building permits also surged by 5.2 percent to an annual rate of 1.491 million in May after slumping by 1.4 percent to a revised rate of 1.417 million in April.

Building permits, an indicator of future housing demand, were expected to rise to a rate of 1.423 million from the 1.416 million originally reported for the previous month.

Stocks In Focus

Shares of DICE Therapeutics (DICE) are soaring in pre-market trading after Eli Lilly (LLY) announced an agreement to acquire the biopharmaceutical company for $48 per share approximately $2.4 billion in cash.

Car rental company Avis Budget (CAR) is also likely to see initial strength after Morgan Stanley upgraded its rating on the company’s stock to Overweight from Equal Weight.

On the other hand, shares of Alibaba (BABA) may move to the downside after the Chinese e-commerce giant announced Chairman and CEO Daniel Zhang is stepping down.