Stocks Fall as Higher Bond Yields Weigh on Tech Stocks

Rich Asplund - Barchart - Tue Dec 27, 2022

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday closed down -0.40%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.11%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.48%.

Stocks on Tuesday settled mixed. Higher T-note yields Tuesday weighed on technology stocks and the overall market. Also, Tesla closed down more than -11% at a 2-year low to weigh on tech stocks after Reuters reported the company would run vehicle production at its Shanghai plant at a reduced rate from Jan 3-19 and stop output from Jan 20-31 for the Chinese New Year. In addition,

Stocks had support Tuesday from hopes that global economic growth will improve after China took steps to roll back its Covid restrictions. China said it would reopen its borders from Covid curbs and eliminate quarantine restrictions for inbound travelers starting January 8. China’s National Health Commission said late Monday that people arriving in China would only be required to obtain negative Covid test results within 48 hours of departure. Also, current limits on the number of international flights between China and the rest of the world and passenger capacity will be removed.

Higher global bond yields were bearish for stocks after the 10-year T-note yield Tuesday rose to a 6-week high of 3.858%, and the 10-year German bund yield jumped to an 11-year high of 2.534%.

On the positive side, U.S. casino operators with exposure to Macau rallied Tuesday after China ended quarantine restrictions for inbound travelers. Also, mining stocks rose, with copper prices climbing to a 6-week high, on optimism that industrial metals demand will improve after China took steps to end pandemic restrictions and reopen its economy.

Tuesday’s U.S. economic news was mostly bearish for stocks. U.S. inventory data was bearish for stocks as it showed Nov wholesale inventories rose +1.0% m/m, above expectations of +0.3% m/m. Also, Nov retail inventories unexpectedly rise +0.1% m/m, above expectations for a -0.1% m/m decline. In addition, the Dec Dallas Fed manufacturing outlook level of general business activity unexpectedly fell -4.4 to -18.8, weaker than expectations of an increase to -13.5. Conversely, the Oct S&P CoreLogic composite-20 home price index eased to a 2-year low of +8.64% y/y but was stronger than expectations of +8.00% y/y.

Today’s stock movers…

Tesla (TSLA) closed down more than -11% Tuesday to a 2-year low to lead losers in the S&P 500 and Nasdaq 100 after Reuters reported the company would run vehicle production at its Shanghai plant at a reduced rate from Jan 3-19 and stop output from Jan 20-31 for the Chinese New Year.

Mega cap tech stocks moved lower and weighed on the overall market. Netflix (NFLX) closed down more than -3%. Also, Alphabet (GOOGL) and Amazon.com (AMZN) closed down more than -2%. In addition, Apple (AAPL) and Meta Platforms (META) closed down more than -1%.

Higher T-note yields Tuesday undercut highly-valued chip stocks and weighed on the overall market. Nvidia (NVDA) closed down more than -7%. Also, NXP Semiconductors NV (NXPI), Marvell Technology (MRVL), and ASML Holding NV (ASML) closed down more than -2%. In addition, Qualcomm (QCOM), Advanced Micro Devices (AMD), Lam Research (LRCX), and Microchip Technology (MCHP) closed down more than -1%.

Southwest Airlines (LUV) closed down more than -5% after it said it expects more cancellations caused by the winter storm that battered the U.S. to continue for at least several more days. Citigroup said the storm chaos could hurt the company’s profits in Q4 by 3% to 5%.

U.S. casino operators with exposure to Macau rallied Tuesday after China ended quarantine restrictions for inbound travelers. Wynn Resorts (WYNN) closed up more than +4% to lead gainers in the S&P 500. Also, Las Vegas Sands (LVS) closed up more than +4%, and MGM Resorts International (MGM) closed up more than +0.01%.

U.S.-listed Chinese stocks moved higher Tuesday after China took steps to reopen its economy and end Covid Zero policies. JD.com (JD) closed up more than +4% to lead gainers in the Nasdaq 100. Also, Alibaba Group Holding (BABA) and Baidu (BIDU) closed up more than +4%. In addition, NetEase (NTES) closed up more than +2%, and Pinduoduo (PDD) closed up more than +1%.

Mining stocks and metals producers rose, with copper prices climbing to a 6-week high on optimism that industrial metals demand will improve after China took steps to end pandemic restrictions and reopen its economy. Freeport-McMoRan (FCX) closed up more than +2%. Also, Southern Copper (SCCO), Alcoa (AA), and Newmont (NEM) closed up more than +1%.

Across the markets…

March 10-year T-notes (ZNH23) Tuesday closed down -24 ticks, and the 10-year T-note yield rose by +10.2 bp to 3.848%. Mar T-notes Tuesday fell to a 1-month low, and the 10-year T-note yield rose to a 6-week high of 3.858%. Global bond markets fell Tuesday on concern the reopening of China’s economy will boost inflation. The 10-year German bund yield rose to an 11-year high of 2.534%. Also, supply pressures are bearish for T-notes as the Treasury this week will auction $142 billion in T-note and floating-rate notes.

A bullish factor for T-note prices Tuesday was strong demand for the Treasury’s $42 billion auction of 2-year T-notes. The auction had a bid-to-cover ratio of 2.71, well above the 10-auction average of 2.58. T-note prices also found support Tuesday from the weakness in stocks, which boosted the safe-haven demand for T-notes.

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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.