Wall Street Breakfast: China Wipeout

China wipeout - Sweeping crackdowns across China are continuing to send shockwaves across financial markets, with investors finding themselves in the firing line of some of the nation's hottest sectors. Shares of Tencent (OTCPK:TCEHY) fell 10% on Monday after Beijing ordered the company to give up exclusive music licensing rights, food delivery companies such as Meituan (OTCPK:MPNGY) were also targeted, while education stocks like TAL Education (NYSE:TAL), New Oriental (NYSE:EDU) and Gaotu Techedu (NYSE:GOTU) slumped about 25% each amid a ban on for-profit tutoring. In fact, the Nasdaq Golden Dragon China Index - which tracks 98 of China's largest firms listed in the U.S. - dropped 8.5% on Friday and another 7% on Monday, marking the biggest two-day selloff since '08. Analyst commentary: "Even when you think China risk is priced, it can get worse," Goldman Sachs wrote in a research note. "The government could come down much harsher than expected penalties for Tencent, they could implement much stricter social insurance programs for delivery drivers/temp employees, they could crack down on other industries viewed as a threat to social cohesion (SFV? Livestreaming? Who knows.)"While Beijing has tolerated conventional regulations on certain sectors in the past, the government now looks ready to kill whole companies or entire industries. One doesn't have to look far to the recent pulling of Ant Group's (NYSE:BABA) IPO or the DiDi Global (NYSE:DIDI) fiasco that shook the investing world earlier this month. China has pointed to financial risk, antitrust concerns and national security violations, but its acceptance of stockholder pain for long-term social control appears to have some market participants reassessing Xi Jinping's Communist Party.Outlook: Investors aren't the only ones reviewing their relationship with China. Another contentious meeting between Washington and Beijing proved unsuccessful on Monday, with Vice Foreign Minister Xie Feng saying the relationship was at a "dead end" and risks "serious consequences." He even presented U.S. Deputy Secretary of State Wendy Sherman with two lists of "red lines" that were necessary to stabilize ties, including "U.S. wrongdoings that must stop" and "key individual cases that China has concerns with." (68 comments)

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Sweeping crackdowns across China are continuing to send shockwaves across financial markets, with investors finding themselves in the firing line of some of the nation's hottest sectors. Shares of Tencent (OTCPK:TCEHY) fell 10% on Monday after Beijing ordered the company to give up exclusive music licensing rights, food delivery companies such as Meituan (OTCPK:MPNGY) were also targeted, while education stocks like TAL Education (NYSE:TAL), New Oriental (NYSE:EDU) and Gaotu Techedu (NYSE:GOTU) slumped about 25% each amid a ban on for-profit tutoring. In fact, the Nasdaq Golden Dragon China Index - which tracks 98 of China's largest firms listed in the U.S. - dropped 8.5% on Friday and another 7% on Monday, marking the biggest two-day selloff since '08.

Analyst commentary: "Even when you think China risk is priced, it can get worse," Goldman Sachs wrote in a research note. "The government could come down much harsher than expected penalties for Tencent, they could implement much stricter social insurance programs for delivery drivers/temp employees, they could crack down on other industries viewed as a threat to social cohesion (SFV? Livestreaming? Who knows.)"

While Beijing has tolerated conventional regulations on certain sectors in the past, the government now looks ready to kill whole companies or entire industries. One doesn't have to look far to the recent pulling of Ant Group's (NYSE:BABA) IPO or the DiDi Global (NYSE:DIDI) fiasco that shook the investing world earlier this month. China has pointed to financial risk, antitrust concerns and national security violations, but its acceptance of stockholder pain for long-term social control appears to have some market participants reassessing Xi Jinping's Communist Party.

Outlook: Investors aren't the only ones reviewing their relationship with China. Another contentious meeting between Washington and Beijing proved unsuccessful on Monday, with Vice Foreign Minister Xie Feng saying the relationship was at a "dead end" and risks "serious consequences." He even presented U.S. Deputy Secretary of State Wendy Sherman with two lists of "red lines" that were necessary to stabilize ties, including "U.S. wrongdoings that must stop" and "key individual cases that China has concerns with." (68 comments)

Stocks

U.S. stock futures started the week on the back foot on Monday, before things turned green and the major averages reached new highs. Will the same occur today? At the time of writing, Dow futures are off 0.5%, while contracts linked to the S&P 500 are down 0.4% and 0.3%, respectively. Fresh highs today would result in a six-day win streak on Wall Street and the latest slew of earnings could be enough to power the next leg of the journey.

Snapshot: Industrial heavyweights General Electric (GE) and 3M (MMM) are scheduled to report this morning, but the presentation will quickly turn into a tech show after the close. Apple (AAPL) is likely to post impressive results as demand remained strong for its 5G iPhones, though analysts will be watching if the global chip shortage will continue to affect sales in the coming quarters. Google parent Alphabet (GOOG, GOOGL) is meanwhile set to benefit from a recovery in ad spend (which was dented by the coronavirus pandemic) and don't forget to look out for other tech earnings like Microsoft (MSFT) and AMD (AMD).

"It appears that we're going to get really solid earnings from these companies and that should give a little bit of a boost to the market," said Victoria Fernandez, chief market strategist at Crossmark Global Investments. "Some of these names have already run so much this year that perhaps we don't get a large bounce."

On the economic calendar: Investors are waiting for the Fed's view of inflation and monetary policy as the FOMC convenes its latest meeting today. It also takes place as the rapidly spreading Delta virus variant spurs concerns about the economic outlook. Meanwhile, Senate Majority Leader Chuck Schumer related that lawmakers may stay in session through the weekend to finish a bill on infrastructure, which is one of the pillars of President Biden's massive economic agenda.

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Earnings

Shares of Tesla (NASDAQ:TSLA) stayed positive after better-than-expected Q2 earnings, with the stock climbing 1.1% to $664 in AH trading on Monday. Not only did the company mark the eighth straight quarter of profit, but it also exceeded $1B of GAAP net income for the first time in its history. The EV maker produced 206,421 cars in Q2 (+151% Y/Y), delivered 201,304 vehicles (+121%) and ended the quarter with a cash position of $16.2B.

On the operations side: Gigafactory Shanghai saw minor interruptions due to supply chain challenges and factory upgrades, but production there was said to have remained strong. European demand also remained well above supply, resulting in growing wait times for delivery. "We continue installing equipment, have begun testing tools and are working as quickly as possible toward starting production in Berlin, while growing import volumes in the interim," Tesla said in a statement.

Buoyed by strong demand, the EV pioneer stuck with a multi-year deliveries view for 50% average annual growth. Tesla also forecast that operating margin will continue to grow over time to reach industry-leading levels after capacity expansion and localization plans kick in. However, Bitcoin-related impairments of $23M were reported for the quarter as crypto prices plunged, but the drop in the value won't affect earnings as long as Tesla hasn't divested its holdings.

Musk goes offline: The Technoking of Tesla said he may skip future earnings calls - unless he has something big to announce - but had some highlights for investors this time around. "The global chip shortage situation remains quite serious. It does seem like it's getting better, but it's hard to predict." He also delayed the Tesla Semi to 2022, left vague the start of production of the Cybertruck, but said the company's full self-driving subscription could be a significant factor in as early as 2022. (242 comments)

Aviation

Filing for its first Sustainability Report on record, Boeing (BA) said it aims to "significantly reduce its environmental impact during every stage of a product's life cycle." The document makes the U.S. planemaker the latest company to report Scope 3 emissions that result when customers use their products. Commercial planes Boeing delivers in 2020 will be responsible for emissions equivalent to 158M metric tons of CO2 over their lifespan, consisting of 136M tons of CO2 of emissions directly linked to their operation by airlines and 22M tons related to the production by energy companies of the fuel used in flight.

Quote: "We know there's still work to do and are committed to communicating our progress and holding ourselves accountable to ensure the aerospace industry is safe and sustainable for generations to come," Boeing Chief Sustainability Officer Chris Raymond declared.

Bottom line: Boeing will deliver commercial airplanes capable of flying on 100% sustainable aviation fuels by 2030, rather than the maximum 50% ratio of SAF to conventional jet fuel blend for commercial passenger flights today. Among other steps, Boeing said it is advancing flight tests for its all-electric, self-flying Cora air taxi. It also commits to achieving net-zero carbon emissions at work sites, reducing energy consumption by 12%, water use by 23%, solid waste by 44% and hazardous waste by 34%. (31 comments)

Covid

An increasing number of districts and cities have already imposed fresh mask mandates, but a surge in Delta cases is prompting several localities to go one step further. California will soon require state employees and all healthcare workers to provide proof of COVID-19 inoculation or get tested at least once a week, according to Governor Gavin Newsom. 246,000 state employees in the Golden State will be impacted by the order, as well as 2M healthcare workers in the public and private sectors.

"We're at a point in this epidemic, this pandemic, where individuals' choice not to get vaccinated is now impacting the rest of us in a profound and devastating and deadly way," Newsom told a press conference.

He's not alone: Prior to the announcement, NYC Mayor Bill de Blasio said that all city workers will need to be vaccinated or agree to weekly testing by September 13. The Department of Veterans Affairs, which runs one of the nation's largest health systems, also said it would mandate coronavirus jabs for its 115,000 front-line workers. That's the first federal agency to require COVID vaccines and some say it could be a new chapter in the pandemic after public health experts appealed to the population by offering a range of incentives.

Thought bubble: Can your employer legally fire you if you refuse to get a COVID vaccine? Yes, but most companies or government agencies have previously given that decision to their employees (especially with vaccines under FDA emergency approval). If mandated, only a few exceptions would be permitted under law, such as medical reasons, the workforce is unionized, or if taking it is against a "sincerely held" religious belief.

Today's Markets

In Asia, Japan +0.5%. Hong Kong -4.4%. China -2.5%. India -0.5%.
In Europe, at midday, London -0.5%. Paris -0.4%. Frankfurt -0.6%.
Futures at 6:20, Dow -0.5%. S&P -0.4%. Nasdaq -0.3%. Crude flat at $71.89. Gold -0.1% at $1798.10. Bitcoin -1.7% at $37461.
Ten-year Treasury Yield -2 bps to 1.25%

Today's Economic Calendar

FOMC meeting begins
8:30 Durable Goods
8:55 Redbook Chain Store Sales
9:00 S&P CoreLogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
10:00 Consumer Confidence
10:00 Richmond Fed Mfg.
1:00 PM Results of $61B,5-Year Note Auction
1:00 PM Money Supply

Companies reporting earnings today »

Today's Economic Calendar

Bitcoin (BTC-USD) drops after Amazon (NASDAQ:AMZN) denies crypto payment reports.

Olympic ratings slip from 2016, but still dominate TV.

Lucid Motors (NASDAQ:LCID) stock soars in splashy Nasdaq debut.

COVID vaccine trials for children expanded to detect rare side effects.

Sinovac's (NASDAQ:SVA) COVID-19 vaccine antibodies fade after six months.

Aon (NYSE:AON), Willis Towers (NASDAQ:WLTW) scrap merger amid DOJ trouble.

Intel (INTC) sets plan to regain standing as world's top chip company.

American Airlines (NASDAQ:AAL) warns about jet fuel shortages.

EPA to seek stricter limits on toxic waste from coal power plants.

Facebook (NASDAQ:FB) explores Oculus workouts with Apple (NASDAQ:AAPL) Health app.

World Investment

Wall Street Breakfast: China Wipeout

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