Market Update: Stocks Decline Amid Rising Bond Yields and Chip Sector Weakness

Bond Yields

Morning Market Overview

In the early hours of the trading day, September E-Mini S&P 500 futures (ESU23) have dipped by -0.08%, while Sep Nasdaq 100 E-Mini futures (NQU23) are down by -0.25%.

Mixed Start for Stock Index Futures

Stock index futures have opened the day with a mixed performance. Overnight gains were surrendered as bond yields saw an unexpected rise following an expansion in New York state factory activity this month. Initially, stock index futures had surged during overnight trading, driven by promising signs of China’s economic recovery in August, buoyed by strengthened consumer spending and factory output.

Pressure on Nasdaq Futures

Nasdaq stock index futures are under pressure today due to a retreat in chip stocks during pre-market trading. Reuters reported that Taiwan Semiconductor Manufacturing Co requested its major suppliers to delay shipments of high-end chipmaking equipment.

Inflows into U.S. Equities

Bank of America has reported that EPFR Global data indicates a substantial influx of $26.4 billion into U.S. equities during the week ending September 13, marking the largest weekly inflow since March 2022. Additionally, global stocks attracted $25.3 billion in inflows.

Volatility Expected

Market activity is anticipated to be volatile today, primarily due to the triple-witch options event. This event involves the expiration of derivatives contracts tied to stocks, index options, and futures for September, prompting traders to either roll over existing positions or initiate new ones.

Economic Indicators

The U.S. import price index, excluding petroleum, remained unchanged month-on-month for the second consecutive month, aligning with expectations. Meanwhile, the U.S. September Empire manufacturing survey reported a stronger-than-expected rise of +20.9 to 1.9 in general business conditions, surpassing expectations of -10.0.

Rate Hike Expectations

The market is currently pricing in a 4% probability of a +25 basis point rate hike at the September 20 FOMC meeting and a 37% likelihood of the same rate hike at the November 1 FOMC meeting.

Global Bond Yields

Global bond yields have trended higher, with the 10-year T-note yield up by +3.2 basis points at 4.318%. Similarly, the 10-year German bund yield has risen by +6.0 basis points to 2.653%, and the 10-year UK gilt yield has increased by +5.8 basis points to 4.339%.

International Markets

Overseas stock markets are experiencing mixed results. The Euro Stoxx 50 is up by +0.83%, while China’s Shanghai Composite Index closed down by -0.28%. On the other hand, Japan’s Nikkei Stock Index closed with a gain of +1.10%.

Euro Stoxx 50 at 2-Week High

The Euro Stoxx 50 has rallied to a two-week high today and is showing moderate gains. European stocks are extending the gains observed after the recent ECB meeting, where the ECB signaled a pause in its interest rate hike cycle. Furthermore, stronger-than-expected Chinese economic reports have boosted market sentiment, benefiting stocks exposed to China, including luxury goods manufacturers and mining companies. However, chip-equipment stocks, such as ASML Holding NV, have faced declines following reports of delays in high-end chipmaking equipment shipments by Taiwan Manufacturing Semiconductor Co.

Eurozone Labor Costs

In the Eurozone, Q2 labor costs they eased to +4.5% year-on-year from +5.2% year-on-year in Q1. ECB President Lagarde emphasized the significance of borrowing costs and their duration, indicating that the ECB is not currently discussing interest rate cuts. ECB Governing Council member Vasle noted that core inflation remains relatively high, hinting at the possibility of further interest rate hikes.

China’s Economic Indicators

China’s Shanghai Composite Index initially advanced but later posted moderate losses. Weakness in property stocks dragged down the overall market after reports indicated that new home prices in August fell for the third consecutive month, marking the largest decline in 10 months. Additionally, aggressive selling by foreign investors, amounting to 5.6 billion yuan ($770 million) worth of onshore China shares, weighed on the market. However, stocks initially opened higher due to a positive response to the PBOC’s reduction in the reserve requirement ratio for banks, which was implemented after Thursday’s market close. Signs of China’s economic improvement in August were reflected in industrial production and retail sales data, both of which exceeded expectations.

Yuan Strengthens

The yuan strengthened to a two-week high against the dollar following reports that the PBOC requested some Chinese brokerage firms to reduce proprietary trading in the foreign exchange market. This move is part of the PBOC’s efforts to stabilize the yuan, which includes verbal warnings and tightening offshore funding costs.

China’s Economic Data

China’s August industrial production rose by +4.5% year-on-year, surpassing expectations of +3.9% year-on-year and marking the largest increase in four months. Similarly, China’s August retail sales increased by +4.6% year-on-year, exceeding expectations of +3.0% year-on-year. However, new home prices in China declined by -0.29% month-on-month, marking the largest drop in 10 months and the third consecutive month of price declines.

Japanese Stocks

Japan’s Nikkei Stock Index reached a two-week high and closed with moderate gains. Japanese stocks received a boost from stronger-than-expected U.S. retail sales data for August, instilling confidence in the Federal Reserve’s ability to manage a soft landing for the U.S. economy. The gains were further extended after better-than-expected Chinese economic reports on industrial production and retail sales indicated an improvement in China’s economy. Additionally, JPMorgan Chase’s positive outlook on Prime Minister Kishida’s cabinet reshuffling contributed to support for Japanese stocks.

Japanese Tertiary Industry Index

The Japan July tertiary industry index rose by +0.9% month-on-month, surpassing expectations of +0.3% month-on-month.

Pre-Market U.S. Stock Movers

In pre-market trading, chip stocks are declining following reports of delays in high-end chipmaking equipment shipments by Taiwan Semiconductor Manufacturing Co. As a result, ASML Holding NV (ASML), KLA Corp (KLAC), Lam Research (LRCX), and Applied Materials (AMAT) have all fallen by more than +1%.

Adobe (ADBE) has experienced a more than -2% decline in pre-market trading after reporting Q3 earnings results that beat expectations but provided an outlook that analysts perceive as conservative.

Lindsay Corp (LNN) has tumbled by more than -10% in pre-market trading after Stifel downgraded the stock to “hold” from “buy,” citing a challenging near-term outlook and a lack of positive catalysts.

Nucor (NUE) has dropped by more than -3% in pre-market trading after reporting Q3 preliminary EPS of $4.10-$4.20, which falls short of the consensus estimate of $4.56.

DocuSign (DOCU) has slid by more than -1% in pre-market trading after HSBC initiated coverage of the stock with a “reduce” recommendation and a price target of $42.

DoorDash (DASH) has fallen by more than -1% in pre-market trading after MoffettNathanson downgraded the stock to “market perform” from “outperform.”

Unity Software (U) has risen by more than +3% in pre-market trading after Bank of America upgraded the stock to “buy” from “neutral” with a price target of $56.

KeyCorp (KEY) has increased by more than +1% in pre-market trading following Piper Sandler’s upgrade of the stock to “overweight” from “neutral” with a price target of $13.50.

Celsius Holdings (CELH) has gained by more than +1% in pre-market trading after Cowen initiated coverage on the stock with an “outperform” recommendation and a price target of $250.

Apellis Pharmaceuticals (APLS) has climbed by more than +2% in pre-market trading after Wells Fargo Securities upgraded the stock to “overweight” from “equal weight” with a price target of $64.

Earnings Reports (September 15, 2023)

Forafric Global PLC (NASDAQ:AFRI) is scheduled to report earnings today.

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