(Thursday Market Open) It’s the first day of September and already the month appears to be living up to its bad reputation as equity index futures point to a lower open.  

Potential Market Movers

As I mentioned in my September Outlook, the month of September has historically been the worst month on average for the S&P 500® index (SPX) and the Dow Jones Industrial Average ($DJI). While there’s no guarantee this will be the case by the end of September, so far, the month is not off to a good start.

One reason is that China announced that it is locking down more than 21 million residents in the city of Chengdu, which reported 700 new cases of COVID-19. As the northern hemisphere moves into winter months, global cases are likely to rise. This means that lockdown could be an ongoing problem for China’s economy and the global supply chain as China sticks to its zero-COVID policy. Chinese stocks were lower on the news with Shanghai composite down 0.54% and the Heng Seng tumbling 1.79%.

China’s COVID-19 risk is likely contributing to falling oil prices because lockdowns lead to lower demand. WTI crude oil futures are down nearly 8% in the last two days and lost another 1.36% ahead of the opening bell.

There were several stocks moving ahead of the market open as earnings reports continue to come in.

• Ciena (CIEN) was down 11% in premarket action after missing on earnings and revenue estimates. The networking systems company said it’s having trouble getting components.
• Hormel Foods (HRL) missed on earnings despite topping revenue estimates. The stock fell 6.28% ahead of the opening bell as the company reduced its forward earnings guidance despite raising sales forecasts.
• Campbell Soup (CPB) also sold off ahead the market open, dropping 5.88% despite beating on top- and bottom-line numbers. The company also increased its earnings forecasts but cited higher inflation pressures.
• Signet Jewelers (SIG) reported better-than-expected earnings while meeting revenue expectations. SIG fell 1.3% as the company reaffirmed its 2023 earnings guidance.
• Five Below (FIVE) missed on top- and bottom-line estimates but the stock rallied 2.95% as the company reiterated its long-term growth plans.

After the market close, Broadcom (AVGO) and Lululemon (LULU) are also scheduled to report earnings.

Nvidia (NVDA) was down 4.3% in the premarket after an SEC filing revealed that the U.S. government is requiring a new license requirement for computer chips going to China, Hong Kong, and Russia. The new regulation is designed to divert chips that could be used for military purposes.  

After the market open, investors will get an important manufacturing report with the ISM Manufacturing PMI. Better-than-expected manufacturing reports were already released from France and Spain. Italian manufacturing came in as forecasted, while Germany was worse than expected. The eurozone also reported weaker-than-expected manufacturing.

Reviewing the Market Minutes

The stocks in the S&P 500® index (SPX) saw selling pressure most of the day, moving the benchmark index 0.78% lower Wednesday to complete a four-day losing streak. The other major indexes also fell with the Dow Jones Industrial Average ($DJI) tumbling 0.88% and the Nasdaq ($COMP) decreasing 0.56%.

The bulls didn’t get much of chance to get going because Cleveland Federal Reserve President Loretta Mester said in a speech released before the market open that she sees the fed funds rate above 4% next year. The comments appeared to push the 10-year Treasury yield (TNX) up by two basis points to 3.13% but the 2-year Treasury yield fell two basis points to 3.44%.

Social media company Snap (SNAP) rallied 8.7% after offering upbeat revenue guidance the day after falling 5.7% in response to its plans to lay off 20% of its workforce. The rally in Snap seemed to help boost Meta Platforms (META) and Pinterest (PINS), which increased 3.7% and 4.92% respectively. However, Twitter (TWTR) didn’t see any benefit as it fell 1.45%.

Despite the rise in social media stocks, the technology sector was among the worst performers of the day. Consumer discretionary and materials were at the bottom of the list in a session when all sectors were negative.

The energy sector was near the middle of the pack even as WTI crude oil futures prices fell about 3% overnight. Oil saw a positive push in the morning but eventually fell, and the contract settled 2.4% lower at $84.41.

Natural gas futures rose 0.9% on the news that Russia’s energy giant Gazprom is shutting down its Nord Stream 1 pipeline for three days of maintenance. However, European Union (EU) members see it as another threat from Russia in response to sanctions on the warring country. 

Three Things to Watch

 

EUROPE’S ENERGY CRISIS: Russia’s three-day shutoff of natural gas to Germany through its Nord Stream 1 pipeline could be an escalation of the economic pain that could be inflicted on Europe. According to CNN, Europe gets 40% of its natural gas, 27% of its oil, and 46% of its coal from Russia.

European countries are already taking measures to conserve energy. For example, Foreign Policy magazine reported that Germany has built up its gas reserves to 80% of capacity. The Netherlands is cutting back on oil exports and capping energy use. But Europe’s overall dependence on Russia for a variety of energy products makes them even more vulnerable as the winter months approach.

FILLING UP: U.S. gas producers are trying hard to get more product in the houses and businesses of Europeans. On top the increase in demand for propane, the EIA reported that by the end of July, the U.S. had become the world’s largest exporter of natural gas with exports increasing 12% from the last half of 2021 to the first half of 2022. 

Exxon (XOM), Chevron (CVX), and Occidental Petroleum (OXY) are among the top U.S. producers of natural gas that appear on the S&P 500. Outside of S&P stocks, chief investment officer of Hennessy Funds Ryan Kelley told CNBC that Cheniere Energy (LNG) specializes in exporting natural gas around the world.

Propane is different than natural gas because it’s refined from crude oil by companies like Marathon Petroleum (MPC), Valero (VLO), and Phillips 66 (PSX).

If the energy crisis escalates in Europe, these companies should experience an increase in demand for their products.

BUNDLE OF ENERGY: August was a wild month for energy stocks. The Energy Select Sector Index tumbled more than 5% the first week of trading only to rally nearly 15% by August 29. As of yesterday, the energy sector has fallen again, closing the month around 5.6% in the green and finishing as August’s top sector.  

The Technology Select Sector Index moved opposite of energy by gaining 5% by mid-month but selling off and closing the month in the red by 6%. Tech was the worst performing sector in August.

The Utilities Select Sector Index was the only other sector index to finish the month in positive territory—rising more than 2%. In a related note, utilities don’t usually benefit from higher gas prices because the costs are a passthrough expense that goes right to the customer. Utilities are gas distributors and not producers.

Notable Calendar Items 

Sep 2: Employment Situation Report and earnings from DocuSign (DOCU)

Sep 5: Markets closed for Labor Day Holiday

Sep 6: ISM Non-Manufacturing PMI, and earnings from Guidewire (GWRE), HealthEquity (HQY), and Coupa Software (COUP)

Sep 7: U.S. Trade Balance, Federal Reserve Beige Book, and earnings from GameStop (GME), MongoDB (MDB), and UiPath (PATH)

Sep 8: Earnings from Zscaler (ZS), SentinelOne (S), National Beverage (FIZZ), and Korn Ferry (KFY)

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