Stocks Lower on the Outlook for Hawkish Fed

Rich Asplund - Barchart - Mon Feb 6, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.86%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.57%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.10%.

U.S. stock index futures this morning extended last Friday’s losses on concern the Fed will have to raise interest rates for longer after last Friday’s stronger-than-expected Jan payroll report. Stocks are also lower on concern about the escalation of U.S.-China geopolitical tensions after the U.S. shot down an alleged Chinese spy balloon over the weekend.

Negative corporate news today is another bearish factor for stock index futures. Tyson Foods is down more than -5% after reporting weaker-than-expected Q1 sales. Also, PayPal Holdings, Pool Corp, and Edwards Lifesciences are down lat least -3% after being downgraded.

Rising global bond yields are bearish for stocks, with the 10-year T-note yield today climbing to a 3-1/2 week high of 3.636%, and the 10-year German bund yield up +9.52 bp to 2.288%.

On the positive side for stocks is increased M&A activity, with Catalent up more than +24% after a Bloomberg report said that Danaher is said to be interested in acquiring the company. Also, Life Storage is up more than +12% after Public Storage made an $11 billion unsolicited bid for the company.

Overseas markets are mixed. The Euro Stoxx 50 index is down -1.63%. China’s Shanghai Composite stock index closed down -0.76%, and Japan’s Nikkei Stock index closed up +0.67%.

Today’s stock movers…

Tyson Foods (TSN) is down more than -5% to lead losers in the S&P 500 after reporting Q1 sales of $13.26 billion, below the consensus of $13.52 billion.

Newmont (NEM) is down more than -5% after it offered to buy Newcrest Mining in a deal worth $17 billion.

Pool Corp (POOL) is down more than -3% after Stifel downgraded the stock to hold from buy.

PayPal Holdings (PYPL) is down more than -3% after Raymond James downgraded the stock to market perform from outperform.

U.S.-listed Chinese stocks are falling after the action by the U.S. to shoot down an alleged Chinese surveillance balloon heightened tensions between the two countries. Pinduoduo (PDD) is down more than -5% to lead losers in the Nasdaq 100. Also, Alibaba Group Holding (BABA), JD.com (JD), Baidu (BIDU), and NetEase (NTES) are down more than -2%.

Edwards Lifesciences (EW) is down more than -3% after Raymond James downgraded the stock to market perform from outperform.

Catalent (CTLT) is up more than +24% to lead gainers in the S&P 500 after a Bloomberg report said that Danaher is said to be interested in acquiring the company.

Life Storage (LSI) is up more than +12% after Public Storage made an $11 billion unsolicited bid for the company.

Align Technology (ALGN) is up more than +3% to lead gainers in the Nasdaq 100 after the company announced that it had entered into a new accelerated stock repurchase agreement with Citibank to repurchase $250 million of Align Technology’s common stock.

Defense contractors are climbing today on rising geopolitical tension with China after the U.S. shot down an alleged Chinese spy balloon over the weekend. Huntington Ingalls Industries (HII), Lockheed Martin (LMT), and Northrup Grumman (NOC) are up more than +1%.

Idexx Laboratories (IDXX) is up more than +1% after forecasting 2023 EPS of $9.27 to $9.75, with the midpoint above the consensus of $9.47.

Across the markets…

March 10-year T-notes (ZNH23) today are down -22 ticks, and the 10-year T-note yield is up +9.3 bp at 3.618%. Mar T-notes this morning extended last Friday’s sell-off to a 1-month low, and the 10-year T-note yield rose to a 3-1/2 week high of 3.636%. T-note prices are under pressure on negative carry-over from last Friday’s stronger-than-expected U.S. Jan payrolls and Jan ISM services reports, which bolsters the outlook for the Fed to continue raising interest rates. Also, hawkish ECB comments today have pushed up European government bond yields and are undercutting T-note prices. The 10-year German bund yield is up +9.5 bp to 2.288%.

The dollar index (DXY00) today is up by +0.46% and extended last Friday’s rally to a 3-1/2 week high. The dollar is seeing positive carry-over from last Friday’s stronger-than-expected U.S. payroll and ISM services reports, which suggested the Fed will need to continue raising interest rates. A jump in the 10-year T-note yield today to a 3-1/2 week high is also supportive of the dollar, along with today’s slide in stocks, which has boosted liquidity demand for the dollar.

EUR/USD (^EURUSD) today is down by -0.40%. Strength in the dollar today has knocked the euro down to a 3-week low. Losses in EUR/USD were limited by hawkish comments today from ECB Governing Council members Vasle and Holzmann, who said they support continued ECB interest rate hikes.

Today’s Eurozone economic reports were mixed for EUR/USD. On the negative side, Eurozone Dec retail sales fell -2.7% m/m, weaker than expectations of -2.5% m/m and the biggest decline in 20 months. Conversely, the Jan Sentix investor confidence rose by 9.5 points to -8.0, stronger than expectations of -13.5. Also, German Dec factory orders rose +3.2% m/m, stronger than expectations of +2.0% m/m and the biggest increase in 15 months.

USD/JPY (^USDJPY) today is up by +1.07%. The yen today extended last Friday’s decline down to a 3-1/2 week low against the dollar. Higher T-note yields today are weighing on the yen. The yen also fell today after the Nikkei reported that the government approached BOJ Deputy Governor Amamiya to lead the BOJ when current governor Kuroda steps down in April. The appointment of Amamiya to the BOJ Governor is seen as likely to extend the BOJ’s ultra-easy monetary policy stance.

April gold (GCJ3) this morning is up +10.8 (+0.58%), and March silver (SIH23) is down -0.040 (-0.18%). Precious metals prices this morning are mixed, with silver falling to a 2-month low. A rally in the dollar index today to a 3-1/2 week high is bearish for metals prices. Also, higher global bond yields today are bearish for metals. Gold rebounded from a 1-month low today and is moderately higher on increased safe-haven demand from rising geopolitical risks between the U.S. and China after the U.S. shot down an alleged Chinese spy balloon.

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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.