Stocks Undercut by Higher Bond Yields and Weakness in Chip Stocks

Rich Asplund - Barchart - Mon Apr 17, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is up +0.05%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.11%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.23%.

U.S. stock indexes this morning are mixed. An increase in M&A activity is positive for stocks after Merck said it would acquire Prometheus Biosciences for around $10.8 billion. However, chip stocks are falling today after a report said Taiwan Semiconductor Manufacturing, the world’s biggest contract manufacturer of chips, is planning to cut its capital expenditures.

Also, expectations for the Fed to keep raising interest rates are pushing bond yields higher and weighing on the overall market. Bond yields are climbing after inflation expectations rose to a 2-week high, and today’s U.S. news that the Apr Empire manufacturing survey general business conditions index rose to a 9-month high and the Apr NAHB housing market index rose to a 7-month high. The market has priced in an 88% chance for a 25 bp rate hike at the May 2-3 FOMC meeting.

On the negative side for stocks, Alphabet is down more than -3% after the New York Times reported that Microsoft’s Bing might replace Alphabet’s Google as the default search service on Samsung electronic devices. Also, State Street is down more than -12% after reporting an unexpected contraction in Q1 net flows.

On the positive side, Prometheus Biosciences is up more than +69% after Merck struck a deal to acquire the company for around $10.8 billion. Also, Charles Schwab and M&T Bank are up more than +2% after reporting better-than-expected Q1 net interest revenue.

The U.S. Apr Empire manufacturing survey general business conditions index rose +35.4 to a 9-month high of 10.8, stronger than expectations of -18.0.

The U.S. Apr NAHB housing market index rose +1 to a 7-month high of 45, right on expectations.

Global bond yields are higher. The 10-year T-note yield rose to a 2-1/2 week high of 3.600% and is up +8.4 bp at 3.597%. The 10-year German bund yield rose to a 1-month high of 2.496% and is up +5.3 bp at 2.493%, and the 10-year UK gilt yield rose to a 5-week high of 3.700% and is up +2.6 bp at 3.693%.

Overseas stock markets are mixed. The Euro Stoxx 50 is down -0.47%. China’s Shanghai Composite closed up +1.42%, and Japan’s Nikkei Stock Index closed up +0.07%.

Today’s stock movers…

Prometheus Biosciences (RXDX) is up more than +69% after Merck struck a deal to acquire the company for around $10.8 billion.

Charles Schwab (SCHW) is up more than +2% after reporting Q1 net interest revenue of $2.77 billion, better than the consensus of $2.74 billion.

Dexcom (DXCM) is up more than +2% after Raymond James upgraded the stock to a strong buy from outperform with a price target of $138.

HP Inc (HPQ) is up more than +3% after JPMorgan Chase upgraded the stock to overweight from neutral with a price target of $35.

M&T Bank (MTB) is up more than +2% after reporting Q1 net interest income of $1.82 billion, above the consensus of $1.78 billion.

Airline stocks are climbing today after BloombergNEF reported that passenger flight schedules for April 18-24 imply global jet fuel demand will grow by +1.1% w/w to 6.1 million bpd, a sign of stronger air travel demand. American Airlines Group (AAL) is up more than +2%. Also, Delta Air Lines (DAL), Southwest Airlines (LUV), and Alaska Air Group (ALK) are up more than +1%.

BlackRock (BLK) is up nearly +1% after Morgan Stanley raised its price target on the stock to $861 from $829.

Digital Realty Trust (DLR) is up more than +4% after Bank of America said “news of an equity raise could prove to be a clearing event” for the company’s shares.

State Street (STT) is down more than -12% to lead losers in the S&P 500 after reporting Q1 net flows unexpectedly fell -$26 billion versus the consensus of an +$8.44 billion increase. Other trust bank stocks fell on the news, with Bank of New York Mellon (BK) down more than -7% and Northern Trust (NTRS) down more than -5%.

Chip stocks are moving lower after Taiwan’s Economic Daily reported that Taiwan Semiconductor Manufacturing would cut its capex target to a range of $28 billion-$32 billion. As a result, Lam Research (LRCX) is down more than -3%. Also, Advanced Micro Devices (AMD), Applied Materials (AMAT), and KLA Corp (KLAC) are down more than -2%. In addition, Qualcomm (QCOM) and Global Foundries (GFS) are down more than -1%.

Alphabet (GOOGL) is down more than -3% after the New York Times reported that Microsoft’s Bing might replace Alphabet’s Google as the default search service on Samsung electronic devices.

Moderna (MRNA) is down more than -6% to lead loser in the Nasdaq 100 after Bloomberg Intelligence said data presented by the company showing the benefits of its cancer vaccine doesn’t ensure an accelerated approval by the FDA as the length of the Phase II trial and an evolving landscape means consensus may be too optimistic about a 2025 launch.

Zoom Video Communications (ZM) is down more than -2% after Citigroup said, “We see negative data points piling up, which could further pressure growth rates.”

Wolfspeed (WOLF) is down more than -2% after JPMorgan Chase downgraded the stock to neutral from overweight.

Across the markets…

June 10-year T-notes (ZNM23) today are down -16 ticks, and the 10-year T-note yield is up +8.4 bp at 3.597%. June T-notes this morning fell to a 2-week low, and the 10-year T-note yield rose to a 2-1/2 week high of 3.600%. Higher European government bond yields are weighing on T-note prices after the 10-year UK gilt yield rose to a 5-week high of 3.700%, and the 10-year German bund yields rose to a 1-month high of 2.496%. Also, an increase in inflation expectations has undercut T-note prices after the 10-year breakeven inflation expectations rate today rose to a 2-week high of 2.337%. T-notes fell to their lows this morning after the U.S. Apr Empire manufacturing survey general business conditions index rose more than expected to a 9-month high.

The dollar index (DXY00) today is up by +0.33%. Higher T-note yields today are giving the dollar a boost after the 10-year T-note yield rose to a 2-week high. Also, weakness in the yen is supportive of the dollar after the yen today fell to a 1-month low against the dollar.

EUR/USD (^EURUSD) today is down by -0.54%. The euro today is under pressure from a stronger dollar. Also, dovish comments Saturday from ECB Governing Council member Centeno weighed on EUR/USD when he said the ECB at its May meeting should either pause its rate hikes or raise by only 25 bp as Eurozone wage data show “no domestic pressure.”

USD/JPY (^USDJPY) today is up by +0.38%. The yen today dropped to a 1-month low against the dollar. Higher T-note yields today are weighing on the yen. Also, today’s rally in the Nikkei Stock Index to a 5-week high reduced the safe-haven demand for the yen.

June gold (GCM3) this morning is down -6.5 (-0.32%), and May silver (SIK23) is down -0.125 (-0.49%). Precious metals prices this morning are moderately lower. A stronger dollar today is weighing on metals prices. Also, higher global bond yields are undercutting metals prices. Losses in gold are limited by increased inflation expectations that have prompted increased demand for gold as an inflation hedge after the U.S. 10-year breakeven inflation rate today rose to a 2-week high.

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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.