Stocks Tumble as Bond Yields Surge

Rich Asplund - Barchart - Wed Aug 2, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -1.02%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.62%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.67%.

Stocks this morning are moderately lower, with the S&P 500 falling to a 1-1/2 week low. Stocks opened lower after Fitch Ratings’ downgrading U.S. government debt spurred a risk-off sentiment in stocks. Stocks fell further as T-note yields jumped after the Treasury boosted the size of next week’s quarterly refunding more than expected, and after this morning’s July ADP employment change rose more than expected, a hawkish factor for Fed policy.

Fitch Ratings cut the sovereign credit rating of the U.S. by one level to AA+ from AAA, saying, "The rating downgrade of the U.S. reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to AA and AAA rated peers over the last two decades.”

The U.S. Jul ADP employment change rose +324,000, showing a stronger labor market than expectations of +190,000.

The U.S. Treasury boosted the size of its quarterly sale of longer-term debt for the first time in 2-1/2 years, saying it will sell $103 billion of T-notes and T-bonds in its quarterly refunding auctions next week, up from last quarter’s $96 billion and slightly above estimates of $102 billion. The Treasury also said, “While these changes will make substantial progress towards aligning auction sizes with intermediate to long-term borrowing needs, further gradual increases will likely be necessary in future quarters.”

The markets are discounting the odds at 17% for a +25 bp rate hike at the September 20 FOMC meeting.

Global bond yields are mixed. The 10-year T-note yield climbed to a 7-1/2 month high of 4.116% and is up +8.6 bp at 4.110%. The 10-year German bund yield is down -2.7 bp at 2.5294%. The 10-year UK Gilt yield is down -0.7 bp at 4.392%.

Overseas stock markets are lower. The Euro Stoxx 50 is down -1.40%. China’s Shanghai Composite Index today closed down -0.89%. Japan’s Nikkei Stock Index closed down -2.30%.

Today’s stock movers…

Generac Holdings (GNRC) is down more than -19% to lead losers in the S&P 500 after reporting Q2 adjusted EOS of $1.08, weaker than the consensus of $1.17, and cut its full-year net sales forecast to a decline of -10% to -12% from a prior view of -6% to -10%.

Paycom Software (PAYC) is down more than -17% after forecasting Q3 revenue of $410 million-$412 million, below the consensus of $412.1 million.

Johnson Controls International (JCI) is down more than -8% after reporting Q3 adjusted net sales of $7.13 billion, weaker than the consensus of $7.18 billion.

Electronic Arts (EA) is down more than -6% to lead losers in the Nasdaq 100 after reporting Q1 net bookings of $1.58 billion, below the consensus of $1.59 billion, and forecasts 2024 net bookings of $7.3 billion-$7.7 billion, the midpoint below the consensus of $7.6 billion.

Devon Energy (DVN) is down more than -4% after reporting Q2 core EPS of $1.18, weaker than the consensus of $1.20.

Allstate (ALL) is down more than -3% after reporting a Q2 adjusted loss per share of -$4.42, wider than the consensus of -$4.25.

Pinterest (PINS) is down more than -5% after reporting Q2 average revenue per user of $1.53, below the consensus of $1.54.

Norwegian Cruise Line Holdings (NCLH) is down more than -2% after Susquehanna Financial downgraded the stock to neutral from positive.

Waters (WAT) is up more than +6% to lead gainers in the S&P 500 after reporting Q2 adjusted EPS of $2.80, well above the consensus of $2.58.

Bunge Ltd (BG) is up more than +5% after reporting Q2 adjusted EPS of $3.72, stronger than the consensus of $2.65 billion, and raised its full-year adjusted EPS estimate to at least $11.75 from a previous estimate of at least $11.00.

Aflac (AFL) is up more than +5% after reporting Q2 revenue of $5.20 billion, stronger than the consensus of $4.47 billion.

Humana (HUM) is up more than +4% after reporting Q2 revenue of $26.75 billion, above the consensus of $26.25 billion.

Emerson Electric (EMR) is up more than +4% after reporting Q3 adjusted EPS of $1.29, better than the consensus of $1.07, and raised its full-year adjusted EPS forecast to $4.40-$4.45 from a previous estimate of $4.15-$4.25, stronger than the consensus of $4.10.

CVS Health Corp (CVS) is up more than +4% in pre-market trading after reporting Q2 net revenue of $88.92 billion, above the consensus of $86.49 billion.

Assurant (AIZ) is up more than +4% after reporting Q2 adjusted Ebitda of $323.1 million, well above the consensus of $223.6 million.

Trane Technologies (TT) is up more than +3% after reporting Q2 adjusted EPS continuing operations of $2.68, better than the consensus of $2.55.

Across the markets…

September 10-year T-notes (ZNU23) today are down -6 ticks, and the 10-year T-note yield is up +8.6 bp at 4.110%. Sep T-notes this morning fell to a 3-week low, and the 10-year T-note yield rose to a 7-1/2 month high today of 4.116%. Upcoming supply pressures are weighing on T-notes today after the Treasury raised the amount of next week’s quarterly refunding auctions to $103 billion from $96 billion last quarter, more than expectations of $102 billion. T-notes remained under pressure aft today’s report on Jul ADP employment rose more than expected, a hawkish factor for Fed policy. T-notes recovered from their worst levels as a stock slide boosted some safe-haven demand for T-notes.

The dollar index (DXY00) today is up by +0.17% and posted a new 3-week high. The dollar recovered from overnight losses and moved higher due to the jump in T-note yields. Also, today’s slump in stocks has boosted the liquidity demand for the dollar. The dollar today initially moved lower after Fitch Ratings cut the sovereign credit rating of the U.S. by one level to AA+ from AAA.

EUR/USD (^EURUSD) today is down by -0.25%. The euro this morning is moderately lower due to the strength of the dollar. A decline in European government bond yields today has also weakened the euro’s interest rate differentials.

USD/JPY (^USDJPY) is down by -0.02%. The yen today is slightly higher. Today’s -2% sell-off in the Nikkei Stock Index boosted some safe-haven demand for the yen. Also, today’s jump in the 10-year Japanese JGB bond yield to a 9-year high of 0.632% strengthened the yen’s interest rate differentials. A surge in T-note yields today is limiting the strength of the yen.

October gold (GCV3) today is up +5.0 (+0.26%), and Sep silver (SIU23) is down -0.006 (-0.02%). Precious metals prices this morning are mixed. Today’s rally in the dollar index to a 3-week high is bearish for metals. Also, the jump in T-note yields today is negative for precious metals. In addition, gold prices are under pressure from fund liquidation after long gold holdings in ETFs fell to a new 3-year low on Tuesday. The downside in precious metals was limited as the action by Fitch Ratings to downgrade the sovereign credit grade of the U.S. sparked a sell-off in equity markets that boosted the safe-haven demand for precious metals.

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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.