Morning Reads

Morning Reads





After spending a few days in Israel to reassert America's presence in the Middle East, President Biden on Friday will become the first U.S. leader to fly directly from Tel Aviv to Saudi Arabia. On the itinerary is somewhat of a resetting of relations, including energy security, Israeli-Saudi ties and establishing a cohesive regional front to counter Iran. The trip will be a big policy U-turn for Biden, who has previously labeled the Kingdom a "pariah" and refused to talk with Crown Prince Mohammed bin Salman in the aftermath of the killing of U.S.-based columnist Jamal Khashoggi.

What's in it for the Saudis? Riyadh is looking for ironclad security guarantees, especially after Biden ended U.S. support for offensive operations in Yemen. He ordered the removal of Patriot missile batteries and other advanced military systems in 2021, even as the kingdom was being hit by rocket attacks from Iranian-backed Houthi rebels. Arms transfers from China to the Saudis have also expanded by nearly 400% over the past four years, with the U.S. continuing to refuse to sell drones to the Kingdom.

What's in it for the U.S.? WTI crude oil (CL1:COM) tumbled below $91 on Thursday - erasing all the gains seen in the wake of Russia's invasion of Ukraine - though U.S. gasoline prices remain expensive at the pump, averaging $4.58 per gallon nationwide. Biden is set to ask Saudi Arabia to pump even more, in the latest effort to tame high energy prices that are weighing on the economy. According to the International Energy Agency, the Saudis and UAE are the only two producers with significant spare capacity, holding just under 3M barrels a day of idle output between them (about 3% of global demand).

Outlook: "The world has never witnessed such a major energy crisis in terms of its depth and its complexity," IEA Executive Director Fatih Birol warned at an energy forum in Sydney earlier this week. "We might not have seen the worst of it yet. This is affecting the entire world." (21 comments)

Bank earnings

Q2 results from JPMorgan Chase (JPM) and Morgan Stanley (MS) on Thursday did not set a good tone for earnings season. Both stocks slid following lower-than-expected earnings, triggering pain for bank shares across the board. With fears that the U.S. could tip into recession, investors also watched what bank executives had to say about the state of the economy as much as figures surrounding the lenders' balance sheets.

Financial bellwether: JPMorgan posted a worse-than-expected 28% fall in quarterly profit as global investment banking fees slid in a "challenging macro environment." The division is coming off the SPAC boom, as well as IPOs and other dealmaking that rocketed higher in 2021. The bank additionally set aside another $428M to cover possible future loan losses, playing some defense in case things go sour.

On the upside, JPMorgan reported its best earnings from lending in over a decade, benefiting from the rising interest rate environment. It also sounded positive on the U.S. consumer and commercial landscape, with cash balances and defaults holding up well, and spending on Chase credit cards even rising 21% from a year ago. The bank even raised its net interest income guidance for 2022 despite "waning consumer confidence and high inflation. "

Go deeper: JPMorgan temporarily suspended its share buyback program as it builds more capital to meet tougher requirements from the Fed. CEO Jamie Dimon didn't mince words on the matter, unleashing a series of critiques about the central bank's annual exercise. "We don't agree with the stress test," he declared. "It's inconsistent. It's not transparent. It's too volatile. It's basically capricious." Bank earnings continue to flow in this morning, with Wells Fargo (WFC) and Citigroup (C) set to report Q2 results. (30 comments)

Private label

Amazon (AMZN) is reducing the number of items it sells under its own brands by well over half, and the company has discussed the possibility of exiting the private-label business entirely. Disappointing sales for many of the items has led the online retail behemoth to scale back certain household brands, but the broader move is aimed at alleviating regulatory pressure, according to the WSJ. In recent years, U.S. lawmakers and the European Commission have blamed Amazon for giving advantages to its own brands at the expense of products sold by millions of other vendors on its site.

Backdrop: Amazon’s private-label business began in 2009 with consumer electronics, but quickly expanded into other categories. As of 2020, the collection encompassed 243,000 products across 45 different brands that range from home goods to clothing (think Amazon Basics, Solimo, Goodthreads, etc.). Amazon maintains that its house brands only account for about 1% of its retail sales, and that it competes fairly and in a way that benefits its customers.

The review was initiated by Dave Clark, a longtime Amazon executive who took over as head of its global consumer business in January 2021, but left the company last month. Following the analysis, Clark pushed the team to focus on bestselling commodity goods, along the lines of Target's (TGT) "Up & Up" or Walmart's (WMT) "Great Value" brands, rather than the extensive range of current items. The latest report also comes after the retail giant announced that members purchased more than 300M items worldwide during Prime Day 2022, making it the single biggest event in its history.

Response from Amazon: "We never seriously considered closing our private label business and we continue to invest in this area, just as our many retail competitors have done for decades and continue to do today." (3 comments)

China slowdown

Bucking a trend across most of global equities, Chinese stocks have rallied since the beginning of May as severe COVID-19 lockdowns came to an end. Some of that optimism may be running out, however, as cracks appear in the world's second-largest economy. Data on Friday revealed a country that narrowly avoided a contraction in the second quarter, while investors continue to be rattled by the latest developments in China's real estate sector. Shanghai -1.6% to 3,228.

Snapshot: Gross domestic product for Q2 grew at a tepid 0.4% Y/Y, missing forecasts of a 1.0% gain and marking a sharp slowdown from the 4.8% growth notched in Q1. It was also the worst showing for China since it began the data series in 1992, barring a 6.9% contraction in the quarter after the pandemic began in Wuhan. Analysts now say the official growth target of around 5.5% for 2022 will be hard to attain without ditching its strict zero-COVID strategy, which can have knock-on effects for countries across the globe (especially those highly dependent on Chinese commodities and manufacturing).

"China's economy has stood on the edge of falling into stagflation, although the worst is over as of the May-June period. You can rule out the possibility of a recession, or two straight quarters of contraction," noted Toru Nishihama, chief economist at the Dai-ichi Life Research Institute. "Given the tame growth, China's government is likely to deploy economic stimulus measures from now on to rev up its flagging growth, but hurdles are high for PBOC to cut interest rates further as it would fan inflation which has been kept relatively low at present."

Additional worries: Things continue to look shaky in China's capital-starved property sector, which makes up nearly a quarter of GDP by some estimates. A growing number of homebuyers across the country are halting mortgage payments until developers resume construction of unfinished apartments, with the strike (and fears of hefty writedowns) weighing heavily on bank stocks. Home prices growth in June stalled on a monthly basis, while property investment contracted for a fourth straight month and sales slumped by another massive 18.3%.

Today's Markets

In Asia, Japan +0.5%. Hong Kong -2.2%. China -1.6%. India +0.7%.
In Europe, at midday, London +0.7%. Paris +0.5%. Frankfurt +1.4%.
Futures at 6:20, Dow +0.3%. S&P +0.2%. Nasdaq +0.2%. Crude +0.1% to $95.84. Gold -0.4% to $1699.10. Bitcoin +5.5% to $20,865.
Ten-year Treasury Yield -3 bps to 2.93%

Today's Economic Calendar

8:30 Retail Sales
8:30 Empire State Mfg Survey
8:30 Import/Export Prices
8:45 Fed's Bostic Speech
9:15 Industrial Production
10:00 Business Inventories
10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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