Stock Index Futures Climb on Dovish Fed Comments, PepsiCo Earnings on Tap

Oleksandr Pylypenko - Barchart - Tue Oct 10, 2023

December S&P 500 futures (ESZ23)are up +0.20%, and December Nasdaq 100 E-Mini futures (NQZ23) are up +0.26% this morning as comments from Fed officials bolstered bets that the U.S. central bank may stand pat until year-end,while investors continued to evaluate the potential impact of the Israel-Hamas conflict.

In Monday’s trading session, the benchmark S&P 500 and tech-heavy Nasdaq 100 posted 2-week highs, and the blue-chip Dow rose to a 1-week high. Zscaler Inc (ZS) gained over +3% after Barclays upgraded the stock to Overweight from Equal Weight. Also, defense stocks climbed following the unexpected attack by Hamas on Israel over the weekend, with Northrop Grumman Corporation (NOC) surging more than +11% and Lockheed Martin Corporation (LMT) rising over +8%. In addition, energy stocks gained ground as the price of WTI crude rose more than +4%. On the bearish side, airline stocks retreated as most international carriers suspended direct flights to Tel Aviv, with Delta Air Lines Inc (DAL) and American Airlines Group (AAL) falling over -4%. Also, Datadog Inc (DDOG) slid more than -3% after BofA downgraded the stock to Neutral from Buy.

Federal Reserve Vice Chair Philip Jefferson stated on Monday that officials are in a position to “proceed carefully” following the recent uptick in Treasury yields. “Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” Jefferson said. Also, Dallas Fed President Lorie Logan stated that the recent increase in long-term U.S. Treasury yields, along with tighter financial conditions more generally, may result in reduced necessity for the Federal Reserve to implement additional interest rate hikes. “Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal,” Logan said.

“The spike in bond yields coupled with the unfolding geopolitical tensions in the Middle East seem to have served as the catalyst for the much-anticipated dovish shift from the Federal Reserve - a move that equity markets have been eagerly awaiting,” said Tony Sycamore, a senior market analyst at IG Australia.

Meanwhile, U.S. rate futures have priced in a 10.4% chance of a 25 basis point rate increase at the next central bank meeting in November and a 26.9% probability of a 25 basis point rate hike at December’s monetary policy meeting.

On the earnings front, soda and snack giant PepsiCo Inc (PEP) is set to report its Q3 earnings results today.

In other news, the tensions in the Middle East could potentially intensify following a report by the Financial Times stating that a top U.S. general warned Iran to “not get involved” in the Israel-Hamas conflict.

Today, investors will likely focus on U.S. Wholesale Inventories data, which stood at -0.2% m/m in July. Economists foresee the August figure to be -0.1% m/m.

In addition, market participants will be looking toward a batch of speeches from Fed officials Bostic, Waller, Kashkari, and Daly.

In the bond markets, United States 10-year rates are at 4.658%, up +0.34%.

The Euro Stoxx 50 futures are up +1.57% this morning as a slight dovish shift in Federal Reserve officials’ tone boosted risk appetite. Mining stocks led the advance on Tuesday following a report by Bloomberg indicating that China is gearing up to introduce a new round of stimulus measures that may support metal prices. Meanwhile, ECB policymaker Francois Villeroy de Galhau said on Tuesday that inflation is expected to reach the European Central Bank’s target of around 2% by 2025, even in light of the impact of the Israel conflict on commodity prices. In corporate news, Elis (ELIS.FP) gained over +4% following the announcement that Brazil-based asset manager BWGI intends to acquire a 6% stake in the French cleaning services company.

Italy’s Industrial Production data was released today.

The Italian August Industrial Production stood at +0.2% m/m and -4.2% y/y, stronger than expectations of 0.0% m/m and -5.0% y/y.

Asian stock markets today settled mixed. China’s Shanghai Composite Index (SHCOMP) closed down -0.70%, and Japan’s Nikkei 225 Stock Index (NIK) closed up +2.43%.

China’s Shanghai Composite today closed lower as investors rushed to offload stocks with exposure to the Middle East. China Communications Construction tumbled over -8% as the state-owned company inked contracts worth $3 billion in the Middle East over the last three years. Also, China Railway Group slumped more than -7%. Meanwhile, Country Garden Holdings Co Ltd plunged over -10% after China’s largest private property developer warned that it might not be able to meet all of its offshore payment obligations when due or within the relevant grace periods. On the positive side, Hong Kong-listed tech giants advanced on Tuesday, boosted by dovish Federal Reserve remarks. In addition, China said that its Commerce Minister Wang Wentao engaged in “rational and pragmatic” talks with U.S. senators led by Senate Majority Leader Chuck Schumer on Monday.

“As the focus turning to Q3 earnings, selling may have been exhausted somewhat, and upside surprises in upcoming earnings may trigger a tradable rally,” said Redmond Wong, Greater China market strategist at Saxo Markets.

Japan’s Nikkei 225 Stock Index closed sharply higher today, driven by overnight gains on Wall Street, which bolstered investors’ risk appetite, leading them to scoop up beaten-down stocks. Energy stocks led the gains on Tuesday following an overnight spike in oil prices after military clashes between Israel and the Palestinian Islamist group Hamas raised concerns about potential disruptions in Middle East oil supply. Trading firms also climbed, with Sojitz Corp and Itochu Corp soaring over +7%. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed up +3.03% to 21.09.

“Japanese shares were sold too heavily until last week. It was the time for a rebound, and overnight gains in Wall Street supported investor sentiment. Easing U.S. Treasury yields was also a positive factor,” said Shuutarou Yasuda, a market analyst at Tokai Tokyo Research Institute.

The Japanese August Current Account n.s.a. stood at 2.280T, weaker than expectations of 3.091T.

Pre-Market U.S. Stock Movers

Immunic Inc (IMUX) surged about +36% in pre-market trading after the biotech firm announced positive interim data from the Phase 2 CALLIPER trial.

Akero Therapeutics Inc (AKRO) climbed over +18% in pre-market trading after announcing the hosting of an investor conference on Tuesday to share topline week 36 results from its Phase 2b SYMMETRY study.

Juniper Networks Inc (JNPR) fell more than -2% in pre-market trading after JPMorgan downgraded the stock to Neutral from Overweight.

Rivian Automotive Inc (RIVN) rose over +3% in pre-market trading after UBS upgraded the stock to Buy from Neutral.

EXACT Sciences Corporation (EXAS) gained more than +2% in pre-market trading after Piper Sandler upgraded the stock to Overweight from Neutral.

Pagerduty Inc (PD) plunged over -6% in pre-market trading after the company announced it intends to offer a $350 million principal amount of convertible senior notes due 2028 in a private placement.

You can see more pre-market stock movershere

Today’s U.S. Earnings Spotlight: Tuesday - October 10th

PepsiCo (PEP), Neogen (NEOG), E2open Parent Holdings (ETWO), AZZ (AZZ).

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On the date of publication, Oleksandr Pylypenko 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.