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CNBC ON DIGG

China's Tumble and Toll

Published: Wednesday, 29 Jul 2009 | 9:18 AM ET

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By: Bob Pisani
Reporter

Stock futures turned lower as durable goods came in much weaker than expected.

What happened to China? The Shanghai Composite closed down 5 percent, it's biggest one day drop this year; at one point it was down 8 percent intraday.

Hong Kong's Hang Seng Index was also down 2.4 percent.

The decline appears to have been led by a big drop in industrial and commodity stocks, on a decline in commodity prices. This is what happened yesterday in the U.S., as sudden dollar strength hurt those two sectors.

But the Shanghai Composite is up almost 100 percent since its bottom in November (!); little wonder there is speculation the government might step in to limit trading and deflate the bubble a bit (good luck with that).

This despite two successful IPOs: today, China State Construction Engineering Corp (they built that "water cube" swimming pool for the Beijing Olympics), closed up 56 percent in its first day of trading.

Earlier this week, Sichuan Expressway (love these names) also debuted successfully.

Here in the U.S., commodity stocks like Aluminum Corp of China [ACH Loading... () ] and Freeport McMoran [FCX Loading... () ] are down 2 to 6 percent pre-open. Bear in mind that the dollar index has rallied two days in a row.

Elsewhere:

1) top steelmakers are generally making negative comments this morning:

ArcelorMittal [MT Loading... () ] down 6 percent pre-open, reported an earnings loss much greater than expected, revenues were also lower than expected. They indicated a recovery before 2011 was unlikely, even though demand for steel would be up in China due to the country's stimulus; Japan's Nippon Steel said demand remained weak.

U.S. Steel [X Loading... () ] down 2 percent after reporting a smaller-than-expected Q2 loss (-$3.28 vs. -$3.45 est). It was the steelmaker's second straight quarterly loss as weak demand and poor pricing have put pressure on the company's results. The company noted conditions are still weak, but are improving (steel prices above June lows, customers beginning to buy still again).

However, a return to profitability is still not expected in the current quarter as "the outlook for overall demand remains uncertain."

2) Sprint [S Loading... () ] down 6 percent after its Q2 loss was worse than expected (-4 cents vs. -2 cents est.). The phone carrier continued to lose wireless customers during the quarter, as its subscriber base fell by 991,000 - albeit a slightly smaller drop than expected. This comes as rivals Verizon [VZ Loading... () ] and AT&T [T Loading... () ] each reported subscriber gains of over 1 million customers in the past quarter.

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3) Hertz [HTZ Loading... () ] reported a 92 percent drop in quarterly income, but earnings still beat expectations (12 cents vs. 6 cents est.). Demand was weak as car rental revenue dropped 19 percent and equipment rental sales plunged 38 percent.

CEO Mark Frissora says "volume and pricing trends have improved" this summer. Still, 2009 revenues will fall short of estimates ($6.7 billion-$7 billion vs. $7.2 billion est.), but earnings of 12 cents-15 cents far exceeds expectations of a 2-cent loss.

4) Yahoo [YHOO Loading... () ] and Microsoft [MSFT Loading... () ] confirmed a long-awaited Internet search deal. With the 10-year partnership, Microsoft's Bing search engine will power the site, while Yahoo will provide the sales force. The venture will help both companies compete against Google [GOOG Loading... () ], the number one search page on the Web. The deal is expected to close next year.

5) The rally sucks in more traders: 42.2 percent (from 36.7 percent) of financials newsletter writers are now bullish, up from 36.7 percent the prior week, according to Investors Intelligence. Bears dropped to 31.1 percent (from 35.6 percent).

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