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Stocks Tumble on Weakness in Chip Stocks and Higher Bond Yields

Barchart - Mon Oct 31, 2022

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday fell by -0.73%, the Dow Jones Industrials Index ($DOWI) (DIA) fell by -0.39%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell by -1.22%.  Weakness in chip stocks led technology stocks lower after Foxconn Technology Group, the world’s largest maker of iPhones, said it might boost production capacity at alternative sites to mitigate potential disruption at its main Covid-stricken plant in China.

Record-high inflation in Europe boosted European and U.S. bond yields and weighed on stocks.  The 10-year German bund yield rose by +4 bp to 2.14%, and the 10-year T-note yield rose +7 bp to 4.08% after news that Eurozone Oct consumer prices rose at a record pace of +10.7% y/y.

The outlook for higher U.S. interest rates was another bearish factor for stocks.  The market has priced in a 100% chance the Fed will raise the federal funds target range by +75 bp on Wednesday after the 2-day FOMC meeting concludes. The markets will also scour post-meeting comments from Fed Chair Powell for clues about the size of future rate hikes. The markets are currently discounting a 100% chance that the FOMC at its next meeting in December will rate its funds rate target by at least another +50 bp.

Monday’s U.S. economic news was weaker than expected and bearish for stocks.  The Oct MNI Chicago PMI unexpectedly fell -0.5 to 45.2, weaker than expectations of an increase to 47.3 and the steepest pace of contraction in 2-1/4 years.  Also, the Oct Dallas Fed manufacturing outlook level of general business activity fell -2.2 to -19.4, weaker than expectations of -17.4.

Stocks were also undercut by negative Chinese news.  China’s Shanghai Composite tumbled to a 6-month low Monday as increased Covid restrictions and weaker-than-expected economic news worsened the outlook for stocks. Chinese authorities imposed fresh lockdowns throughout the country as new Covid cases soar.  China reported 2,675 new Covid infections on Sunday, the most in 2-1/2 months. 

China’s strict Covid Zero policy has reduced economic activity and hammered growth.  Monday’s economic news showed that China’s Oct manufacturing PMI fell -0.9 to 49.2, weaker than expectations of 49.8.  Also, China’s Oct non-manufacturing PMI fell -1.9 to 48.7, weaker than expectations of 50.1 and the steepest pace of contraction in 5 months.

Today’s stock movers…

U.S. semiconductor chip stocks were under pressure Monday after Foxconn Technology Group, the world’s largest maker of iPhones, said it may boost production capacity at alternative sites to mitigate potential disruption at its main Covid-stricken plant in China.  NXP Semiconductors NV (NXPI) fell -3.56%, Marvell Technology (MRVL) fell -3.12%, Advanced Micro Devices (AMD) fell -3.02%, Nvidia (NVDA) fell -2.31%, Microchip Technology (MCHP) fell -1.88%, Analog Devices (ADI) fell -1.44%,  and Qualcomm (QCOM) fell -1.18%.

Apple (AAPL) fell -1.42% after reporting that sales of iPhones in China dropped by -27% in the week ended October 24, the third straight week of steep declines.

Oil stocks Monday rallied desite lower oil prices and President Biden’s call for Congress to implement an excess profits tax on large U.S. oil companies. Exxon (XOM) closed +0.22%, Marathon Oil (MRO) closed +1.09%, Haliburton (HAL) closed +1.43%, and Schlumberger  (SLB) closed +3.26%.

Fertilizer and grain handling stocks moved higher Monday on rally in grain prices after Russia canceled a deal to allow grain exports from Ukraine’s Black Sea ports, and said shipping in the Black Sea would be “much riskier.”  The Russian news sparked rallies of +6.4% in wheat prices, +1.6% in corn prices, and +1.4% in soybean prices.  Archer-Daniels-Midland (ADM) rallied +2.34%, Mosaic (MOS) rallied +1.27%, and CF Industries (CF) rallied +0.67%.

U.S. casino stocks with exposure to Macau climbed Monday after Chinese authorities said mainland visitors could apply for electronic travel permits to Macau starting November 1, giving a potential boost to casinos battered by Covid restrictions.   Wynn Resorts (WYNN) rallied +9.74% to lead gainers in the S&P 500.  Las Vegas Sands (LVS) rallied +2.61%, and Melco Resorts & Entertainment (MLCO) rallied +2.82%.

ON Semiconductor (ON) fell -8.97% to lead losers in the S&P 500 index after forecasting Q4 adjusted EPS of $1.18-$1.34, the midpoint below the consensus of $1.27. 

Align Technology (ALGN) rallied +3.14% after it announced it entered into a new accelerated stock repurchase agreement with Goldman Sachs to buy back $200 million of common stock under the existing $1 billion buyback program.

Global Payments (GPN) fell -8.70% after reporting Q3 adjusted EPS of $2.48, weaker than the consensus of $2.49.

Newell Brands (NWL) fell -8.24% after Barclays downgraded the stock to underweight from equal weight. 

Verisk Analytics (VRSK) rallied +1.07% after agreeing to sell its energy-consulting arm Wood Mackenzie to Veritas Capital for $3.1 billion.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Monday fell by -13 ticks, and the 10-year T-note yield rose by +7.3 bp to 4.085%.  Record-high consumer prices in Europe pushed European and U.S. government bond yields higher.  The Eurozone Oct CPI rose by a record +10.7% y/y, which may prompt the ECB to maintain its aggressive rate-hike campaign.  The T-note market is also on edge ahead of this week’s FOMC meeting, where the FOMC is unanimously expected to raise rates by +75 bp and may indicate that its aggressive rate-hike regime will continue unimpeded. 

More Stock Market News from BarchartOn 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.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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