Global Stocks Rally on China Optimism and Hopes for Less-Aggressive Fed

Rich Asplund - Barchart - Mon Jan 9, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +1.17%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.68%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +2.04%.

Stock indexes this morning are moderately higher, with the S&P 500 and Dow Jones Industrials climbing to 3-week highs and the Nasdaq 100 climbing to a 2-1/2 week high.

U.S. stock index futures this morning are moderately higher on optimism about China’s reopening and expectations of slower Fed interest rate hikes. Stock indexes have carryover support from today’s rally in China’s Shanghai Composite to a 3-1/2 week high on signs the government will offer more support to help China’s economy recover from the end of its Covid-Zero policy. Stocks also have support on expectations the Fed will slow its pace of tightening monetary policy after last Friday’s economic news showed the Dec ISM services index contracted at its steepest pace in 2-1/2 years.

Expectations of a less aggressive Fed are giving mega-cap technology stocks and the overall market a boost today. Also, energy stocks are climbing, with the price of WTI crude oil up more than +2%.

On the negative side, defense contractors are falling today on concern the election of Kevin McCarthy as Speaker of the House will pose risks for U.S. defense spending since part of the agreement to elect McCarthy reportedly includes a cap to fiscal year 2024 discretionary spending across government at 2022 levels.

Morgan Stanley warns that the S&P 500 could fall by -22% from current levels in the event of a mild recession, as corporate profit estimates are still too high and the equity risk premium is at its lowest level since 2008.

Overseas markets today are higher. The Euro Stoxx 50 index is up +1.55%. The Shanghai Composite Stock index closed up by +0.58%, and Hong Kong’s Hang Seng Stock Index closed up +1.89%. Japan was closed today for the Coming of Age Day holiday.

Today’s stock movers…

Expectations of less aggressive Fed policy are boosting technology stocks. Nvidia (NVDA) and Advanced Micro Devices (AMD) are up more than +6%. Also, Salesforce (CRM) is up more than +3% to lead gainers in the Dow Jones Industrials. In addition, Amazon.com (AMZN), Apple (AAPL), and Alphabet (GOOGL) are up more than +2%.

Energy producers and energy service providers are moving higher, with the price of WTI crude up more than +2%. Diamondback Energy (FANG), Marathon Oil (MRO), Devon Energy (DVN), Baker Hughes (BKR), and Occidental Petroleum (OXY) are up more than +2%.

Freeport-McMoRan (FCX) is up more than +3%as mining stocks gain, with the price of copper soaring to a 6-1/2 month high and gold prices rising to an 8-month high.

Tesla (TSLA) is up more than +7% to lead gainers in the S&P 500 and Nasdaq 100 on hopes that demand for electric vehicles will improve as China ramps up the pace of its reopening. Other electric vehicle makers are climbing as well, with Lucid Group (LCID) up more than +5% and Rivian Automotive (RIVN) up more than +3%.

Lululemon Athletica (LULU) is down more than -9% to lead losers in the Nasdaq 100 after lowering its guidance for gross margin to shrink as much as 1.1% in the quarter ending in January versus a previous forecast for an increase of as much as 0.2%.

Regeneron Pharmaceuticals (REGN) is down more than -7% to lead losers in the S&P 500 after it reported preliminary Eylea U.S. net product sales in Q4 of $1.50 billion, below the consensus of $1.64 billion.

Defense contractors are under pressure today on concern the election of Kevin McCarthy as Speaker of the House will pose risks for U.S. defense spending as part of the agreement to elect McCarthy includes a cap to fiscal year 2024 discretionary spending across government at 2022 levels. As a result, Northrop Grumman (NOC) is down more than -2%. Also, Lockheed Martin (LMT), Huntington Ingalls Industries (HII), L3Harris Technologies (LHX), and Raytheon Technologies (RTX) are down more than -1%.

Across the markets…

March 10-year T-notes (ZNH23) today are up +2 ticks, and the 10-year T-note yield is down -0.8 bp at 3.551%. Mar T-note prices this morning are slightly higher on positive carryover from last Friday after weaker-than-expected U.S. reports on hourly earnings and contraction in the services sector bolstered expectations for the Fed to dial down its aggressive rate hike campaign. However, gains in T-notes are limited as a rally in stocks today has reduced the safe-haven demand for T-notes. Also, higher German bund yields are weighing on T-note prices, with the 10-year German bund yield up +5.4 bp today at 2.263%. Finally, supply pressures are undercutting T-notes as the Treasury will auction $90 billion of T-notes and T-bonds this week, beginning with Tuesday’s $40 billion auction of 3-year T-notes.

The dollar index (DXY00) today is down by -0.58% at a 7-month low. Expectations for the Fed to be less aggressive in tightening monetary policy is undercutting the dollar today after last Friday’s U.S. economic news showed wages climbing less than expected and service sector activity contracting last month. Also, optimism about China’s reopening has boosted the yuan today to a 4-3/4 month high against the dollar.

EUR/USD (^EURUSD) today is up by +0.81%. The euro today extended last Friday’s gains up to a 7-month high. A weaker dollar today is supporting the euro. Also, hawkish comments today from ECB Chief Economist Lane gave EUR/USD a boost when he said price pressures in the Eurozone will remain elevated even if surging energy costs start to ease. In addition, a jump in Eurozone Jan Sentix investor confidence to a 7-month high is bullish for the euro.

ECB Chief Economist Lane said price pressures in the Eurozone will remain elevated even if surging energy costs start to ease and that the original energy shock resulting from Russia's war in Ukraine and pandemic reopening effects will feed into wages "for the next two or three years."

The Eurozone Jan Sentix investor confidence rose +3.5 to a 7-month high of -17.5, slightly stronger than expectations of -18.0.

German Nov industrial production rose +0.2% m/m, weaker than expectations of +0.3% m/m.

USD/JPY (^USDJPY) today is down by -0.14%. A weaker dollar today has sparked short covering in the yen. Trading activity in the yen today remains subdued, with Japanese markets closed for the Coming of Age Day holiday.

February gold (GCG3) this morning is up +13.4 (+0.72%), and March silver (SIH23) is up +0.143 (+0.60%). Precious metals prices this morning are moderately higher, with gold climbing to an 8-month high. A slump in the dollar index today to a 7-month low is bullish for metals prices. Silver also has carryover support today from a rally in copper prices to a 6-1/2 month high on speculation industrial metals demand in China will receive a boost as it reopens its economy.

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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.