Stocks Show Mixed Performance as Bond Market Stabilizes

Bond Yields

In today’s market update, the performance of major stock indices shows a mixed picture. The S&P 500 Index ($SPX) (SPY) has dipped by -0.11%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.29%, while the Nasdaq 100 Index ($IUXX) (QQQ) is up by +0.42%.

This morning, the stock market is experiencing a blend of ups and downs. The Dow Jones Industrials, in particular, has reached a four-month low. The temporary relief in the bond market, marked by lower bond yields today, has alleviated concerns regarding rising interest rates, providing support to the stock market. T-note yields have retreated following the release of September’s monthly ADP employment report, which showed fewer job additions than expected, signaling a more dovish stance on Fed policy. However, the stock indexes have pulled back from their recent highs as energy stocks faced a decline due to a more than -3% drop in crude oil prices, hitting a three-week low. Additionally, stronger-than-expected reports for September ISM services and August factory orders contributed to the rise in T-note yields and weighed on stock prices.

Key Economic Indicators

  1. The U.S. September ADP employment change registered an increase of +89,000, falling short of expectations of +150,000 and marking the smallest gain in over 2-1/2 years.
  2. The U.S. September ISM services index recorded a -0.9 decline to 53.6, surpassing expectations of 53.5.
  3. U.S. August factory orders showed a significant increase of +1.2% month-on-month, exceeding expectations of +0.3% month-on-month.
  4. Weekly U.S. MBA mortgage applications witnessed a -6.0% decline in the week ending September 29, reaching their lowest level since 1996. The home purchase sub-index also fell -5.7% to 136.6, the lowest since 1995, while the refinancing sub-index dropped by -6.6% week-on-week. The 30-year fixed mortgage rate surged by +12 basis points to 7.53%, marking the highest level in almost 23 years.

Market Expectations

The markets are pricing in a 20% probability that the FOMC will raise the funds rate by +25 basis points at the upcoming FOMC meeting, concluding on November 1. There’s a 40% chance of a +25 basis point rate hike at the subsequent meeting, which concludes on December 13. The market’s anticipation further includes the likelihood of the FOMC beginning rate cuts in the latter half of 2024 in response to an expected economic slowdown in the United States.

Bond Market Update

U.S. and European bond yields are exhibiting mixed movements. The 10-year T-note yield retreated from a new 16-year high of 4.880% and is currently down by -1.9 basis points, reaching 4.777%. Meanwhile, the 10-year German bund yield also retreated from a 12-year high of 3.026%, falling by -0.3 basis points to 2.968%. The 10-year UK gilt yield, on the other hand, surged to a 1-1/2 month high of 4.666%, marking an increase of +3.4 basis points to 4.631%.

Global Markets

Overseas stock markets are generally on a downtrend. The Euro Stoxx 50 is down by -0.11%, while China’s Shanghai Composite Index was closed due to the Golden Week holidays. Japan’s Nikkei 225 closed today with a -2.28% decline.

Stock Movers

  • Airline stocks are gaining momentum as crude oil prices dip by more than -3% to a three-week low, reducing fuel costs and potentially boosting airline profits. American Airlines Group (AAL) has risen by more than +2%, with Delta Air Lines (DAL), Southwest Airlines (LUV), and United Airlines (UAL) also experiencing gains of more than +1%.
  • Molson Coors Beverage (TAP) has seen an increase of more than +2% following the announcement of a new $2 billion stock buyback plan.
  • Cruise line stocks are on the rise today, driven by Shore Capital Stockbrokers’ upgrade of Carnival to “hold” from “sell.” Consequently, Carnival (CCL), Norwegian Cruise Line Holdings (NCLH), and Royal Caribbean Cruises Ltd (RCL) have gained more than +1%.
  • Matson Inc (MATX) is up by more than +3% after Wolfe Research upgraded the stock to “outperform” from “peer perform,” setting a price target of $113.
  • Palantir Technologies (PLTR) has surged by more than +2% as it emerges as the top contender for a contract to overhaul the UK’s National Health Service.
  • Hub Group (HUBG) is up by more than +2% after Wolfe Research upgraded the stock to “outperform” from “peer perform,” with a price target of $98.

Energy Sector Under Pressure

Energy companies and energy service stocks are facing headwinds today, with WTI crude oil prices plummeting by more than -3% to a three-week low. Consequently, Phillips 66 (PSX) has experienced a drop of more than -4%, leading the losers in the S&P 500, while Valero Energy (VLO) and Marathon Petroleum (MPC) are also down by more than -4%. Additionally, Haliburton (HAL), Marathon Oil (MRO), Devon Energy (DVN), Diamondback Energy (FANG), and Schlumberger (SLB) have recorded losses of more than -3%. Chevron (CVX) leads the losers in the Dow Jones Industrials with a decline of more than -2%.

Notable Stock Declines

  • A10 Networks (ATEN) has witnessed a significant decline of more than -33% after forecasting preliminary Q3 revenue in the range of $56.5 million to $58.5 million, falling well below the consensus estimate of $74.5 million.
  • Cal-Maine Foods (CALM) is down by more than -7% after reporting Q1 net sales of $459.3 million, which was weaker than the consensus estimate of $479.5 million.
  • ON Semiconductor (ON) is experiencing a decline of more than -1% after BNP Paribas Exane downgraded the stock to “neutral” from “outperform.”
  • PPL Corp (PPL) has dipped by more than -1% after UBS downgraded the stock to “neutral” from “buy.”

Bond Market Resurgence

In the bond market, December 10-year T-notes (ZNZ23) have gained +6 ticks, resulting in a decline of -1.9 basis points in the 10-year T-note yield, which now stands at 4.777%. This recovery comes after T-notes reached a new 16-year nearest-futures low earlier in the session. Short covering in T-notes ensued after the release of the September ADP employment report, signaling a slowing labor market, which aligns with a more dovish outlook on Fed policy. However, the stronger-than-expected September ISM services and August factory order reports led to a retracement from T-notes’ peak levels.

Dollar Weakens

The dollar index (DXY00) has declined by -0.33% today. The dollar is facing downward pressure due to the underwhelming monthly ADP employment report, which contributed to lower T-note yields and weakened the dollar’s position. Additionally, a rebound in the stock market has diminished the demand for the dollar.

Euro Strengthens

EUR/USD (^EURUSD) has surged by +0.47% today. The euro is gaining ground against the dollar, benefiting from the dollar’s weakness. Furthermore, hawkish comments from ECB President Lagarde provided a boost to EUR/USD as she stated that the ECB will maintain restrictive interest rates “for as long as necessary.”

Mixed Economic Data for the Eurozone

Today’s economic news for the Eurozone presents a mixed outlook for the euro. On the positive side, the Eurozone’s September S&P composite PMI was revised upward by +0.1 to 47.2 from the initial report of 47.1. However, August retail sales disappointed with a -1.2% month-on-month decline, worse than the expected -0.5% month-on-month decrease, marking the largest decline in eight months. Additionally, August PPI fell by a record -11.5% year-on-year, down from a -7.6% year-on-year decline in July, which is considered a dovish factor for ECB policy. ECB President Lagarde emphasized that future ECB decisions would ensure interest rates remain at sufficiently restrictive levels for an extended period.

Japanese Yen’s Modest Gains

USD/JPY (^USDJPY) has recorded a modest decline of -0.09%. The yen is making modest gains as T-note yields fall. Additionally, the yen has received support from economic data, as the Japan September Jibun Bank services PMI was revised upward. Moreover, the yen benefited from higher Japanese government bond yields, with the 10-year JGB bond yield reaching a 10-year high of 0.810%.

Precious Metals Dip

December gold (GCZ3) has declined by -2.1 (-0.11%), while December silver (SIZ23) is down by -0.032 (-0.15%). Precious metals are experiencing a modest decrease in prices today. The strength in the stock market has reduced the safe-haven demand for precious metals. Additionally, hawkish comments from ECB President Lagarde weighed on gold when she expressed the intention to keep interest rates restrictive for an extended period. Furthermore, long liquidation pressures are affecting gold as holdings in ETFs fell to a 3-1/2 year low on Tuesday. However, a weaker dollar is limiting losses in precious metals, along with a decline in T-note yields.

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