Raphael Stevens

U.S. stock index futures were flat during overnight trading Wednesday, as the S&P 500 prepares to wrap its worst first half in decades.
Futures contracts tied to the Dow Jones Industrial Average added 0.1%. S&P 500 futures gained 0.07%, while Nasdaq 100 futures were flat.

During regular trading the Dow advanced 82 points, or 0.27%, for the first positive day in three. The S&P 500 and Nasdaq Composite both posted a third straight negative day, declining 0.07% and 0.03%, respectively.
The Dow and S&P 500 are on track for their worst three-month period since the first quarter of 2020 when Covid lockdowns sent stocks tumbling. The tech-heavy Nasdaq Composite is down more than 20% over the last three months, its worst stretch since 2008.
The S&P 500 is also on track for its worst first half of the year since 1970, as myriad factors pressure markets.
“Surging inflation, the pivot in Fed policy, and historically pricey equity valuations were on the minds of investors as the year began,” noted John Lynch, chief investment officer for Comerica Wealth Management.
“[T]he combination of COVID-19 lockdowns in China and Russia’s invasion of Ukraine has escalated volatility further with investors becoming increasingly concerned about the possibility of [a] global recession sometime within the next year,” he added.

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The Federal Reserve has taken aggressive action to try and bring down rampant inflation, which has surged to a 40-year high.
Federal Reserve Bank of Cleveland President Loretta Mester told CNBC that she supports a 75 basis point hike at the central bank’s upcoming July meeting if current economic conditions persist. Earlier in June, the Fed raised its benchmark interest rate by three-quarters of a percentage point, which was the largest increase since 1994.
Some Wall Street watchers are worried that too-aggressive action will tip the economy into a recession.
“We do not believe the stock market has bottomed yet and we see further downside ahead. Investors should be holding elevated levels of cash right now,” said George Ball, chairman of Sanders Morris Harris.
“We see the S&P 500 bottoming at around 3,100, as the Federal Reserve’s aggressive, but necessary inflation-fighting measures are likely to depress corporate earnings and push stocks lower,” he added.
All three major averages are on track to end June with losses. The Nasdaq Composite is on pace for a third straight month of declines. The tech-heavy index has been hit especially hard as investors rotate out of growth-oriented areas of the market. Rising rates makes future profits — like those promised by growth companies — less attractive.
The index is more than 30% below its Nov. 22 all-time high. Some of the largest technology companies have registered sizeable declines this year, with Netflix down 70%. Apple and Alphabet have each lost roughly 22%, while Facebook-parent Meta has slid 51%.
On the economic data front, weekly jobless claims will be in focus Thursday. Economists surveyed by Dow Jones are expecting 230,000 first-time filers. Personal income and spending data will also be released.
On the earnings front Constellation Brands and Walgreens Boots Alliance will post quarterly updates before the opening bell, while Micron is on deck for after the market closes.

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The Consumer Financial Protection Bureau said in an advisory opinion Wednesday that “pay-to-pay” fees charged by debt collectors are often illegal.
The watchdog labeled these as a type of “junk” fee, on which it has been cracking down more broadly this year.

Anchiy | E+ | Getty Images

Certain “junk” fees often levied by debt collectors are illegal under federal law, the Consumer Financial Protection Bureau said Wednesday.
Debt collectors charge so-called “pay-to-pay” fees, which are also known as convenience fees, when consumers make a payment online or over the phone, according to the federal agency.

These fees violate the Fair Debt Collection Practices Act when they aren’t “expressly authorized by the agreement creating the debt” or in instances when they’re not “expressly authorized by law,” the CFPB said in an advisory opinion.
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“Federal law generally forbids debt collectors from imposing extra fees not authorized by the original loan,” CFPB Director Rohit Chopra said Wednesday in a written statement. “Today’s advisory opinion shows that these fees are often illegal, and provides a roadmap on the fees that a debt collector can lawfully collect.”
The Consumer Financial Protection Act transferred primary responsibility for the Fair Debt Collection Practices Act, including issuing regulations and ensuring compliance, to the CFPB in 2010, according to the agency announcement.
The bureau issued a request in January asking consumers for input on hidden and excessive fees from a range of lenders. Last week, CFPB officials indicated they may tighten rules governing late fees charged by credit card companies, which the agency categorized as another type of “junk” fee.

‘Heavy handed’ to some, welcome relief to others

The U.S. Chamber of Commerce on Tuesday called Chopra’s agenda “ideologically driven” and “unlawful,” creating “uncertainty” that would lead financial companies to limit mortgages, car loans and personal credit to consumers.
Among other criticisms, the business trade group said the bureau director “coined the term ‘junk fees’ as ‘exploitive income streams’ in a heavy-handed attempt to vilify legal products that have well-disclosed terms.”
Leah Dempsey, a shareholder at the lobbying firm Brownstein Hyatt Farber Schreck and a consultant for ACA International, a trade group representing debt collectors, cast doubt on the legality of the CFPB’s actions Wednesday.

“There is judicial precedent in various states that contradicts the actions today of a single, unelected director at the CFPB,” Dempsey said in a written statement.
But some consumer groups see additional action on debt-collection fees as welcome to relieve financial burdens on struggling households.
“People in those situations are probably least able to carry any additional burden of cost” associated with debt they’ve already had trouble repaying, according to Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling, a nonprofit offering debt advice to consumers.

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A security guard stands next to a Bed Bath & Beyond sign at the entrance to a New York City store location.
Scott Mlyn | CNBC

Check out the companies making headlines in midday trading.
Bed Bath & Beyond — Shares of the retailer plummeted 23.6% after the company missed revenue estimates and posted a wider-than-expected loss in the recent quarter. Bed Bath & Beyond also announced it is replacing CEO Mark Tritton.

Carnival — Shares of the cruise line operator fell 14.1% after Morgan Stanley cut its price target on the stock roughly in half and said it could potentially go to zero in the face of another demand shock, given Carnival’s debt levels. The call dragged other cruise stocks lower. Royal Caribbean and Norwegian Cruise Line Holdings dropped 10.3% and 9.3%, respectively.
Upstart — Shares of the AI lending platform dropped 10.2% after Morgan Stanley downgraded the stock to underweight from equal weight. The Wall Street firm said rising interest rates and a troublesome macroenvironment is hurting Upstart’s growth trajectory.
Bath & Body Works — The retailer’s stock fell nearly 9% after JPMorgan downgraded shares to neutral from overweight. The firm lowered its second quarter and full-year earnings estimates for Bath & Body Works after reducing second quarter average unit retail estimates by 4% year over year.
Teradyne — Shares of the semiconductor testing company slid 5.2% following a downgrade to neutral from buy from Bank of America. The firm said Teradyne’s exposure to Apple could ding the stock in the near term, given uncertainty around iPhone demand.
Tesla — Shares declined 1.8% following a Wall Street Journal report that said Tesla is closing its San Mateo, California, office and laying off 200 workers. CNBC confirmed the report.

General Mills — The stock jumped 6.4% after General Mills reported an earnings beat on the top and bottom lines. Still, the cereal company’s full-year profit estimates were weaker than expected, because of a consumer shift to cheaper brands.
O’Reilly Automotive — The auto parts company traded up 1.1% following an upgrade to buy from neutral from D.A. Davidson. The firm said O’Reilly is their “preferred way” to play the auto parts theme compared to AutoZone and Advance Auto Parts. Auto parts companies, which typically sell nondiscretionary products, are expected to weather downturns better than other retailers.
McDonald’s — Shares climbed 2% following an upgrade to overweight by Atlantic Equities. The firm said hamburger chain will hold out as consumer spending slows.
Goldman Sachs — Shares rose 1.3% after Bank of America upgraded Goldman Sachs to a buy from a neutral rating and said the bank will thrive even in an economic slowdown.
— CNBC’s Yun Li, Tanaya Macheel and Samantha Subin contributed reporting.

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“Another one!” was how a Singaporean manager of serviced apartments greeted your correspondent, fresh off the plane from Hong Kong. The response tells you which of the two cities is currently enjoying an influx of people and business. The latest impetus has been their contrasting approaches to the pandemic. Singapore began opening up to the rest of the world last year; by comparison, although the quarantine periods for arrivals to China and Hong Kong have been shortened, there is no sign yet of their end. Hong Kong is widely seen as the third-most-important city for global finance and business, after New York and London, and ahead of Shanghai and Singapore. Most historians trace its rise as a financial centre to the early 1970s, when it became a hub for Asian offshore financing. Its importance increased dramatically after China began to open up under Deng Xiaoping in 1978. Hong Kong was where Western bankers could rub shoulders with Chinese businessmen while private-sector activity in the mainland was still finding its feet. The deals they made were governed by the territory’s reliable regulatory framework and courts that made use of English law. Yet even before the pandemic, the established order of Asia’s global hubs was being thrown into doubt. Over the quarter-century since Hong Kong was returned to Chinese sovereignty, the mainland has tightened its grip on the territory’s institutions. Under its influence, Hong Kong has introduced a sinister national-security law; the city’s independent judiciary, long valued by foreign investors, has been weakened by political intervention. That has tarnished its appeal relative to Singapore, another entrepot with a common-law legal system, business-friendly regulation and low taxes. South-East Asia has become an increasingly desirable place for Western companies to do business, which, by virtue of proximity, further burnishes Singapore’s allure. And for firms intending to do business in China, meanwhile, the benefits of setting up in Hong Kong, rather than Shanghai, are diminishing. How will the roles of these cities evolve in the face of such forces? To answer the question, consider three measures of the importance of a city for global business and finance: its use as a base for conducting regional or global business; its position as a centre for wealth made elsewhere to be managed and invested; and the size of its capital market and the banking activities associated with it.Start with where business is. Hong Kong’s status as a regional base for global firms was always tied to China, but that relationship has become closer still in recent years. In 2012, 333 American firms used the city as a base for their Asian or greater China operations. That number has steadily declined since. Meanwhile, the number of Chinese firms with regional headquarters in the territory is booming (see chart).Singapore does not produce similar statistics, but a flurry of recent openings by big firms is illustrative. Sony Music, an American entertainment company; Dyson, a British home-appliance maker; and VinFast, a Vietnamese maker of electric vehicles, have all set up regional or global headquarters there in recent years. Chinese tech firms including Alibaba, TikTok and Tencent have done so, too, led by their need to be outside the great firewall in order to run their global operations.Singapore has publicly been ambivalent about stealing business from Hong Kong. Lee Hsien Loong, the city-state’s prime minister, has welcomed expats, but said that he would be just as happy if they felt able to remain in Hong Kong, contributing to the region’s dynamism. But in the background the approach is less magnanimous; the city’s sharp-elbowed investment-promotion agency works to help would-be migrants with visas and business registrations. Shanghai had attracted Western outposts before the pandemic. Some firms, such as Coca-Cola, had moved their Asia headquarters there from Hong Kong. Regulatory changes in 2020 allowed foreign investment banks to run majority-controlled businesses in China. Several have consequently expanded their operations in Shanghai and Beijing. Foreign asset managers including BlackRock and Amundi have also scaled up their onshore presence. The city’s grim lockdowns may have cooled that ardour in the near term. In a recent survey by the American Chamber of Commerce in Shanghai, only one American firm out of 133 planned to increase its investment in China. Yet for firms intending to have some exposure to the mainland, Shanghai may ultimately prove unavoidable. The more Hong Kong comes under China’s thumb, the less unattractive being based on the mainland becomes. China may be more draconian in its approach both to governance and covid-19, but it is at least home to a huge market. “If you want to be in China, it will be increasingly important to be onshore and close to your clients and companies,” says Christian Brun of Wellesley, an executive-recruitment firm for the financial-services industry. Mr Brun predicts job growth on the mainland and in Singapore, with fewer roles for expats in particular in Hong Kong. (He himself has moved from Hong Kong to Singapore.)A second gauge of the cities’ relative dominance is wealth management. It is here that the competition between Hong Kong and Singapore has been fiercest. By one measure, Hong Kong’s pot of assets under management and fund advisory rose from nearly $1.3trn in 2010 to more than $3trn in 2020. But a comparable measure for Singapore shot up from around $1trn to $3.4trn, with the city overtaking Hong Kong as long ago as 2017. Its simple laws for establishing trusts and its tax efficiency have attracted wealth to it. A new form of investment vehicle launched in 2020, the variable-capital company, has also proved popular with fund managers. Hong Kong has been squeezed in other areas of investment management, too. Of the 20 largest venture-capital-fund managers globally, measured by capital raised in the past decade, seven were in Beijing, Shanghai and Shenzhen. Venture capitalists hoping to cash in on South-East Asia’s boom have chosen Singapore as a base. The city’s closer links with Indian firms are also an attraction.When it comes to capital markets and investment banking, our third gauge of the cities’ importance, though, Hong Kong retains its crown. With China’s government showing no sign of allowing capital to flow freely in and out of the mainland soon, the territory’s value as a gateway remains. It hosts the Connect programmes that allow foreign investors to trade onshore bonds and equities, and Chinese punters to trade stocks in the territory. Three-quarters of all transactions in yuan made through the swift interbank-messaging system are booked in Hong Kong. The territory has been a hub for Chinese firms to list in recent years, including Alibaba and jd.com in 2019 and 2020 (though few have come this year). Overall, the value of the city’s listed stocks runs to nearly $5trn, compared with $7trn in Shanghai and $700bn in Singapore. That in turn has helped Hong Kong sustain an edge in global banking, even though some desks have moved to Singapore to skirt the territory’s quarantine rules. Hong Kong, then, will remain a route to investing in China. But it may be less likely to attract other sorts of new business. The companies that do move there are more likely to be Chinese. To others, Hong Kong’s delay in reopening seems to typify its indifferent approach to its global status. Faced with it, firms seeking to do business in Asia more broadly may choose Singapore. And those wanting to do business in China may expand their presence onshore instead. Where Hong Kong alone used to suffice, some firms may start to see a Shanghai-and-Singapore strategy—which uses the first for operations in China and the second for those in the rest of Asia—as an attractive long-term bet. ■ More