Rising Bond Yields Drag Market Averages Lower

Barry Adams
20 Oct, 2022
New York City

Stocks on Wall Street turned morning gains to evening losses after bond yields advanced and closed at new 14-year highs. 

The latest batch of positive earnings lifted the market sentiment in the early hours of trading, but investors were unnerved by the rise in bond yields.  

The rising yields on Treasuries overshadowed corporate earnings as investors worried that the Federal Reserve will continue its aggressive rate hike. 

Comments from Philadelphia Fed President Patrick Harker suggested that the central bank is likely to lift rates "well above 4%" and hold rates at elevated levels to bring down inflation to its target range of 2%. 

The S&P 500 index fell 0.8% to 3,665.78 and the Nasdaq Composite index dropped 0.6% to 10,614.84. 

Crude oil advanced but natural gas prices fell and extended one-week losses on the falling demand and exports. 

Crude oil edged up 6 cents to $85.61 and natural gas declined 14 cents to $5.31 a thermal unit. 

Treasury yields continued to climb as worries of rate-path overshadowed positive earnings from the latest batch of corporate earnings. 

The yield on 2-year Treasury notes increased to 4.62%, 10-year Treasury notes jumped to 4.24% and 30-year bonds increased to 4.23%. 

 

Existing Home Sales Fell In September 

Existing home sales in September fell 1.5% to 4.71 million annual rate, the lowest rate in 2022 and dropped to the level not seen since September 2012, excluding the onset of coronavirus in 2020. 

Home sales declined for the eighth month in a row as mortgage rates continue to escalate and home prices remain elevated across the nation. 

The median existing home sale price in the month was $384,800, an increase of 8.4% from a year ago and the inventory of unsold homes declined for the second month in a row to 1.25 million, according to the report released by the National Association of Realtors. 

 

U.S. Stocks Movers 

AT&T Inc rose 7.7% to $16.74 after the telecom operator posted better-than-expected quarterly earnings as consumers splurge on latest smartphones and the company adds more subscribers for its fiber broadband and wireless services. 

The telecom operator reported $30.4 billion in quarterly revenues and earned 68 cents a share. 

IBM jumped 4.7% to $128.30 after the tech company reported better-than-expected results and lifted its annual revenue growth forecast to exceed mid-single digit.  

Tesla dropped 6.6% after the electric vehicle maker reported third quarter revenue that missed investors' expectations. 

Revenue in the third quarter increased 56% to $21.4 billion from $13.7 billion a year ago. 

Net income in the quarter doubled to $3.3 billion from $1.6 billion and diluted earnings per share rose to 95 cents from 48 cents a year ago.

Alcoa closed 3% higher and the company reported unexpected quarterly loss after alumina costs rose faster than Aluminum prices. Higher energy costs also weighed on the quarter's results. 

Snap closed down 0.7% in regular trading session and in the after-hour trading plunged additional 25.8% to $8.0 after the social media company reported weaker-than-expected revenue of $1.13 billion for the third quarter. 

The company also said its Snapchat+ subscription service has 1.5 million users with a monthly charge of $3.99 and is available in 170 countries.  

 

Cautious European Markets 

Caution prevailed in European markets despite positive corporate results on the ongoing worries of elevated energy prices and aggressive rate hike worries. 

The DAX index edged down 0.3% to 12,706.18, the CAC-40 index increased 0.3% to 6,058.01 and the FTSE index was nearly unchanged at 6,919.29.

The euro edged up to 98.02 U.S. cents and the British pound held near $1.12.

Brent crude increased $2.04 to $94.40 a barrel and TTF natural gas rose 12.5% to 126.52 euros a MWh.

 

Record Current Account Deficit In Euro Zone 

The Euro zone's current account deficit shot up to a record high in August, according to the data released by the European Central Bank. 

Deficit increased to 26.323 billion euros in August from 19.960 billion euros in August, and swung from 17.089 billion euros a year ago. 

 

UK  Prime Minister's Resignation May Not End Political Chaos 

U.K. political turmoil consumed another prime minister in less than two months after Liz Truss was forced to cut short her appointment. 

Prime Minister Liz Truss announced her resignation and the UK will search for its fifth prime minister in six years, the third Conservative prime minister forced out in as many years. 

Truss' premiership lasted only 45 days, the shortest on record after economic missteps damaged her credibility and party rebellion evaporated her authority.  

Political infighting and mini-budget proposals and U-turns sapped support for Truss'  leadership as post-Brexit turmoil reached a new high. 

About three weeks ago after the release of the Truss government's mini-budget which included unfunded and uncalled tax cuts for the wealthy, sparked a bond market turmoil and sank the pound more than 3%. 

The sudden and sharp market swings led to the once unthinkable Gilt market meltdown prompting the Bank of England to take emergency steps costing the central bank 65 billion pounds.  

Conservative Party will elect a new leader before October 28 and former finance minister Rishi Sunak and home minister Suella Braverman are expected to run for the leadership position. 

Former Prime Minister Boris Johnson is also expected to run for the leadership but Liberal Democratic Party has urged Conservative Party to prevent Johnson from seeking the office again. 

With no clear leader in sight, the turmoil in Conservative Party is likely to spillover in financial markets in the weeks and months ahead. 

 

Asian Markets Fall On Diverging Monetary Policy 

Benchmark indexes in Asia declined on the worries that the diverging monetary policies of the region with the U.S. may drive the region's currencies lower. 

Nikkei 225 Average declined 0.9% to 27,006.96, the Hang Seng index dropped 1.4% to 16,280.22 and the Sensex index increased 0.2% to 59,202.90. 

The yen dropped to 150 against the U.S. dollar, the lowest not seen since 1990 and the Japanese bond yield traded above the 0.25% limit set by the Bank of Japan. 

Stocks in Mumbai opened lower but major averages pared losses on the corporate earnings optimism. 

The rupee dropped to a new low and fell below 83 to a dollar after the reserve currency resumed its climb. 

The yuan also dropped to a 14-year low of 7.2205 on the rising U.S. Treasury bond yields.