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Stocks Close Lower on Heightened Geopolitical Risks and Soaring Bond Yields

Barchart - Wed Oct 18, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -1.34%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.98%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.41%.

Stocks on Wednesday closed sharply lower, with the Nasdaq 100 falling to a 1-week low.  Stocks retreated Wednesday on the risks of an escalation in the Israeli-Hamas war after an explosion at a Gaza hospital complicated diplomatic efforts to contain the conflict.  After the bombing, the leaders of Jordan, Egypt, and the Palestinian Authority canceled their scheduled summits with President Biden on Wednesday.

Airline stocks moved lower and weighed on the overall market after United Airlines Holdings warned that the Israeli-Hamas war and higher jet fuel costs would weigh on earnings.  Also, Morgan Stanley closed down more than -6% after reporting weaker-than-expected Q3 wealth management revenue.  A jump in the 10-year T-note yield to a new 16-year high Wednesday was bearish for stocks.

Crude prices rose more than +1% at a 2-week high, which boosted energy stocks.  Crude prices jumped after Iran’s foreign minister called for an oil embargo against Israel. 

Tuesday’s U.S. housing news was mixed for stocks.  U.S. Sep housing starts rose by +7.0% to 1.358 million units, which was weaker than expectations for an increase to 1.383 million. However, Sep building permits fell by -4.4% to 1.473 million units, slightly stronger than expectations for a larger decline to 1.453 million units.

Weekly U.S. MBA mortgage applications fell -6.9% in the week ended Oct 13 to 166.9, the weakest reading in 28 years.  The mortgage purchase sub-index fell 5.6% to its lowest level in 28 years, and the refinancing sub-index fell -9.9%.  The average 30-year fixed mortgage rate rose +0.3 bp to 7.70%, the highest in 23 years.

Fed comments Wednesday were mixed for T-notes and stocks. On the bearish side, NY Fed President Williams said despite inflation progress, there's still a way to go, and the Fed will need to keep interest rates restrictive "for some time." Conversely, Fed Governor Waller suggests he favors pausing Fed rate hikes when he said, "I believe we can wait, watch, and see how the economy evolves before making definitive moves on the path of the policy rate."

The Fed Beige Book was slightly dovish, stating, "The near-term outlook for the economy was generally described as stable or having slightly weaker growth, and labor market tightness continued to ease across the nation."

The markets are discounting a 6% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 42% chance for that +25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in the second half of 2024 in response to an expected slowdown in the U.S. economy.

U.S. and European bond yields Wednesday moved higher.  The 10-year T-note yield rose to a 16-year high of 4.926% and finished up +6.6 bp at 4.900%.  The 10-year German bund yield rose to a 1-1/2 week high of 2.934% and finished up +4.3 bp at 2.924%.  The 10-year UK gilt yield rose to a 2-week high of 4.664% and finished up +14.5 bp at 4.657%. 

Overseas stock markets on Wednesday settled mixed.  The Euro Stoxx 50 closed down -1.12%. China’s Shanghai Composite Index closed down -0.80%.  Japan’s Nikkei 225 today closed up +0.01%.

Today’s stock movers…

Albemarle (ALB) closed down more than -9% to lead losers in the S&P 500 after Bank of America Global Research downgraded the stock to underperform from neutral.

Airline stocks were under pressure Wednesday after United Airlines flagged a sharp profit decline should flights to and from Israel remain grounded due to the Israel-Hamas conflict.  As a result, United Airlines Holdings (UAL) closed down more than -9%.  Also, American Airlines Group (AAL)and Alaska Air Group (ALK) closed down more than -5%, and Delta Air Lines (DAL) closed down more than -4%. 

Lucid Group (LCID) closed down more than -9% to lead losers in the Nasdaq 100 after CFRA downgraded the stock to sell from hold with a price target of $4.

JB Hunt Transport Services (JBHT) closed down more than -8% after reporting Q3 EPS of $1.80, weaker than the consensus of $1.83.

Morgan Stanley (MS) closed down more than -6% after reporting Q3 wealth management net revenue of $6.40 billion, below the consensus of $6.58 billion. 

Northern Trust (NTRS) closed down more than -6% after reporting Q3 net interest income of $469.4 million, below the consensus of $473.3 million.

Nvidia (NVDA) closed down more than -3% after it warned that new U.S. rules on chip exports to China could hinder product development and cause other difficulties. 

Sherwin-Williams (SHW) closed down more than -4% after Bank of America Global Research downgraded the stock to underperform from neutral.

Citizens Financial Group (CFG) closed down more than -5% after reporting Q3 revenue of $2.01 billion, weaker than the consensus of $2.04 billion.

Diabetes stocks rallied after better-than-expected earnings results from Abbott Laboratories eased concerns that the Ozempic weight-loss drug would curb demand for their products. As a result, Dexcom (DXCM) closed up more than +6% to lead gainers in the S&P 500 and Nasdaq 100.  Also, DaVita (DVA) closed up more than +3%, and Insulet (PODD) closed up more than +2%. 

Abbott Laboratories (ABT) rallied +3.71% after reporting Q3 net sales of $10.14 billion, better than the consensus of $9.81 billion. 

Nasdaq Inc (NDAQ) closed up more than +3% after reporting Q3 net revenue of $940 million, stronger than the consensus of $933.7 million.

Procter & Gamble (PG) closed up more than +2% to lead gainers in the Dow Jones Industrials after reporting Q1 organic revenue rose +7.00%, stronger than the consensus of +5.83%.

Energy stocks and energy service providers moved higher, with the price of WTI crude up more than +1% at a 2-week high.  As a result, Valero Energy (VLO) and Phillips 66 (PSX) closed up more than +2%.  Also, Occidental Petroleum (OXY), APA Corp (APA), Exxon Mobil (XOM), and Marathon Petroleum (MPC) are up more than +1%. 

Floor & Decor Holdings (FND) closed up nearly +1% after S&P Dow Jones Indices said the company will replace Vicor Corp in the S&P MidCap 400, effective on Friday’s open.

Across the markets…

December 10-year T-notes (ZNZ23) Wednesday closed down -11 ticks, and the 10-year T-note yield rose +6.6 bp to 4.900%.   Dec T-notes Wednesday fell to a new 16-year nearest-futures low, and the 10-year T-note yield climbed to a 16-year high of 4.926%.  An increase in inflation expectations was bearish for T-notes after the 10-year breakeven inflation rate Wednesday climbed to a 2-3/4 month high of 2.449%. Also, mediocre demand for the Treasury’s $13 billion of 20-year T-bonds was negative for prices, with a bid-to-cover ratio of 2.59, below the 10-auction average of 2.67.  In addition, hawkish comments from NY Fed President Williams weighed on T-notes when he said the Fed will need to keep interest rates restrictive "for some time."

T-notes recovered from their worst levels Wednesday as heightened geopolitical risks in the Middle East undercut stocks and boosted safe-haven demand for T-notes.  Also, dovish comments from Fed Governor Waller gave T-notes a lift when he said he favors pausing Fed rate hikes.

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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.

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