Stocks Slide on China Concerns and Recent Rise in Global Bond Yields

Rich Asplund - Barchart - Fri Aug 18, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.39%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.17%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.58%.

Stocks this morning are moderately lower, with the S&P 500 dropping to a 1-1/2 month low, the Dow Jones Industrials sliding to a 1-1/4 month low, and Nasdaq 100 falling to a 2-month low. Stocks are under pressure as worries about China’s economy and higher global interest rates dampen market sentiment. Stocks recovered from their worst levels today as bond yields declined.

Bank of America warned that U.S. equities could drop another 4% as the economic turmoil in China spooks global investors and bond yields surge. Also, Barclays said, “Markets are being hit by a perfect storm amid surging rates, worsening data in China, and poor summer liquidity.”

Stock trading may be volatile today due to the options expiration of August contracts. According to an estimate from analytical firm Asym 500, some $2.2 trillion of longer-dated contracts are tied to stocks and stock indexes scheduled to mature today.

The markets are discounting the odds at 10% for a +25 bp rate hike at the September 20 FOMC meeting and 36% for that +25 bp rate hike at the November 1 FOMC meeting.

Global bond yields are lower. The 10-year T-note yield is down -4.1 bp to 4.233%. The 10-year German bund yield is down -10.1 bp to 2.608%. The 10-year UK gilt yield is down -7.6 bp to 4.670%.

Overseas stock markets are lower. The Euro Stoxx 50 is down -0.76%. China’s Shanghai Composite Index today closed down -1.00%. Japan’s Nikkei Stock Index closed down -0.5%.

Today’s stock movers…

Keysight Technologies (KEYS) is down more than -12% to lead losers in the S&P 500 after forecasting Q4 revenue of $1.29 billion-$1.31 billion, weaker than the consensus of $1.39 billion.

Weakness in mega-cap technology stocks is weighing on the overall market. Nvidia (NVDA) and Meta Platforms (META) are down more than -3%. Also, Alphabet (GOOGL) is down more than -2%, and Amazon.com (AMZN), Microsoft (MSFT), and Tesla (TSLA) are down more than -1%.

Estee Lauder (EL) is down more than -1% after reporting Q4 adjusted gross margin of 67.8%, below the consensus of 68.5%.

U.S.-listed Chinese stocks are falling today on concern about China’s property crisis and troubles in its shadow banking system. As a result, JD.com (JD) is down more than -5% to lead losers in the Nasdaq 100. Also, PDD Holdings (PDD) is down more than -4%. In addition, Alibaba Group Holding (BABA), NetEase (NTES), and Baidu (BIDU) are down more than -3%.

Deere & Co (DE) is down more than -4% despite raising guidance for full-year earnings on concern the market has peaked for agricultural machinery purchases.

Estee Lauder (EL) is down more than -2% after reporting Q4 adjusted gross margin of 67.8%, below the consensus of 68.5%.

Ross Stores (ROST) is up more than +5% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q2 EPS of $1.32, better than the consensus of $1.16, and forecasting Q3 EPS of $1.16-$1.21, stronger than the consensus of $1.15.

Applied Materials (AMAT) is up more than +1% after reporting Q3 net sales of $6.43 billion, above the consensus of $6.16 billion, and forecasting Q4 net sales of about $6.51 billion, well above the consensus of $5.88 billion.

Walmart (WMT) is up more than +1% to lead gainers in the Dow Jones Industrials after UBS raised its price target on the stock to $190 from $173.

Dolby Laboratories (DLB) is up more than +9% after S&P Dow Jines Indices said the company would replace Staar Surgical in the S&P MidCap 400 before the opening of trading on Aug 22.

Bloomin’ Brands (BLMN) is up more than +7% after the Wall Street Journal reported that Starboard Value has built a stake of more than 5% in the company, making it one of Bloomin’ Brands top-five shareholders.

Across the markets…

September 10-year T-notes (ZNU23) today are up +15 ticks, and the 10-year T-note yield is down -4.1 bp at 4.233%. Sep T-notes today are finding carryover support from strength in European government bonds. Also, the slump in global equity markets today has boosted the safe-haven demand for T-notes.

The dollar index (DXY00) today is down by -0.18%. The dollar today fell back from a 2-month high and is moderately lower. Lower T-note yields today are weighing on the dollar. Also, strength in the yen is undercutting the dollar after core Japanese consumer prices last month rose at their fastest pace in 42 years. Losses in the dollar were limited as weakness in stocks boosts the liquidity demand for the dollar.

EUR/USD (^EURUSD) today is down by -0.01%. The euro today fell to a new 6-week low and is slightly lower. Lower European government bond yields today have weakened the euro’s interest rate differentials and are weighing on EUR/USD. Also, today’s economic news that showed Eurozone Jun construction output fell by the most in 3 months is bearish for the euro. However, dollar weakness today is limiting losses in the euro.

Eurozone Jun construction output fell -1.0% m/m, the biggest decline in 3 months.

USD/JPY (^USDJPY) is down by -0.36%. The yen rose to a 3-session high against the dollar today and is moderately higher. Signs of accelerating inflation in Japan are hawkish for BOJ policy and supportive for the yen after Japan's Jul national CPI ex-fresh food and energy matched its largest increase in 42 years. Also, the slump in the Nikkei Stock Index today to a 2-1/2 month low boosted some safe-haven demand for the yen. In addition, lower T-note yields today are positive for the yen.

Japan Jul national CPI ex-fresh food and energy rose +4.3% y/y and matched May as the largest increase in 42 years.

October gold (GCV3) today is up +8.5 (+0.45%), and Sep silver (SIU23) is up +0.090 (+0.40%). Precious metals prices this morning are moderately higher. A weaker dollar today is boosting metals prices. Also, global bond yields today are supportive of precious metals. In addition, today’s slump in global equity markets has increased demand for precious metals as a safe haven. Gains in gold are limited due to ongoing fund liquidation in gold after long gold holdings in ETFs fell to a 3-1/3 year low on Thursday.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.