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Before The Bell - The U.S. stock market is set to open notably lower this morning, with a continuation of the selling that took place on the final day of trading last week. The Friday selloff was driven by concerns about the health of the U.S. consumer following a disappointing reading on consumer sentiment (more below). Today, investors are reacting negatively to reports over the weekend detailing a spike in global COVID-19 cases just as many of the world’s economies near full re-openings. That, combined with worries about the Delta variant strain of the COVID-19 virus and whether the vaccines will provide enough protection against the strain, is prompting a “flight to safety” move around the global equity markets. Not surprisingly, the CBOE Volatility Index (or VIX), is expected to jump on the renewed coronavirus concerns and investors are moving into safe-haven instruments, like U.S. Treasuries and the U.S. dollar.  
 
On Friday, the major equity averages sold off and in the process ended a three-week winning streak for Wall Street. The Dow Jones Industrial Average, the NASDAQ, and the S&P 500 Index fell 506, 153, and 52 points, respectively. The selling was prompted by a weaker-than-expected reading on consumer sentiment, which overshadowed an unexpected increase in June retail sales. The University of Michigan’s Consumer Sentiment Index fell to 80.8, the lowest level since February. The expectation called for a reading north of 86.0. The survey showed that consumers are feeling a little skittish about the prospects of higher costs, with the cost of living likely to climb nearly 5% this year. This, along with the recent drop in Treasury bond yields are bringing some concerns that the pace of economic growth may be slowing. The consumer discretionary stocks fell on the lower-than-expected consumer sentiment reading. Indications are that consumers worried about looming higher costs are putting off purchases of big-ticket items right now. The consumer accounts for roughly two-thirds of the nation’s GDP.
 
Meantime, the trading week at hand will bring a heavy dose of earnings news from Corporate America. The second-quarter reporting season commenced last week with reports from the big banks. The banking data produced a mixed reaction from Wall Street. But so far, the earnings data have been overshadowed by commentary from the Federal Reserve and talk about inflation. And by the looks of the futures this morning, the earnings news on what will be a light day of reports will again take a backseat to the COVID-19 and economic worries. This week’s slate of reports will highlighted by quarterly results from nine Dow-30 components, including technology giants International Business Machines (IBM) and Intel (INTC). The latter report will be one to watch, as the semiconductor giant will provide some more color on the ongoing chip shortage, which is causing supply-chain issues for many industries.
 
On the economic front, the news will be notably lighter. But we will get a few important reports this week, headlined by the latest sales figures for new and existing homes. Investors will also be keeping a close eye on the initial weekly claims data and the leading indicators, both of which are due ahead of the market’s open on Thursday morning. That said, the news from the business beat is likely to be dwarfed by the renewed global COVID-19 concerns and the aforementioned plethora of earnings reports due over the next five days.
 
The inflation concerns are not likely to go away anytime soon. Last week, Federal Reserve Chairman Jerome Powell in testimony before Congress attempted to calm the markets with his statements about prices. The central bank leaders reiterated his stance that the recent pricing pressures will prove temporary. What the stock market does later this year will probably depend on whether the lead bank is correct on its assessment of inflation. If prices were to prove more than transitory, it will bring renewed calls for a monetary tightening, a backdrop that is not historically ideal for equities. 
 
Before the bell, the equity futures, as noted above, are presaging a lower opening for the U.S. stock market. So far overseas, the trading has been decisively negative. The main indexes in Asia, save for China’s Shanghai Composite, finished markedly lower overnight, while the major European bourses are well in the red as trading moves into the second half of the session on the Continent. The risk-off trade will definitely be on display this morning, as investors digested the latest reports on the fast-spreading Delta variant strain of the COVID-19 virus and what impact it may have on the ongoing economic recovery. The yield on the benchmark 10-year Treasury note, which moves inversely to the price, fell to 1.25% earlier this morning, its lowest level since mid-February. This will likely put the defensive-oriented and higher-yielding stocks on the radars of investors this morning. Stay tuned. – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.