Market Rally Stalled After Stocks Hit Valuation Ceiling

Barry Adams
20 Jun, 2023
New York City

Stocks lacked direction and market indexes declined after advancing for weeks. 

U.S. market indexes opened lower and spent today's session in red following the Juneteenth holiday on Monday.  

Investors also digested the unexpected surge in housing starts in May despite elevated home prices and rising mortgage rates. 

For weeks, markets extended rally on the expectations that the Federal Reserve is more likely to pause rate hikes and continued to rally after the Fed's decision. 

The rally continued on the hopes that the central bank is nearing the end of its monetary tightening cycle despite the Fed Chairman Jerome Powell saying future rate path is data dependent.  

At the end of last week, the S&P 500 index advanced for the fifth week in a row by 2.6% and the Nasdaq Composite index gained for the eighth week and added 3.2%. 

Tech stocks rally powered the two-month rally on the expectations of AI fueled demand for semiconductor chips and software platforms. 

The narrow rally of the last two months has relied on the hopes of rising sales and earnings at tech companies in the belief that demand for AI services will kick off a new business and consumer spending cycle. 

Investors are hoping that the latest rate-pause is likely to be extended at the next policy meeting in July and the U.S. economy is resilient enough to avoid recession this year, two large assumptions that may not prove to be correct.  

In addition, market gains are muted because of the decline in energy prices. 

In overseas news, China trimmed its loan prime rate by 10 basis points for 1-year to 3.65% and 5-year  to 4.2%. 

Despite the expected marginal rate cuts, market indexes in Hong Kong and Shanghai declined after the government did not announce deeper structural reforms to revive the weak economic recovery. 

The Hang Seng index declined 1.5% and the Shanghai Composite index dropped 0.5% after a cabinet meeting on Friday failed to provide additional stimulus measures. 

 

U.S. Indexes & Yields 

The S&P 500 index futures decreased 0.3% and the Nasdaq Composite futures declined 0.4%. 

The yield on 2-year Treasury notes increased to 4.70%, 10-year Treasury notes edged up to 3.75% and 30-year Treasury bonds eased to 3.85%. 

Crude oil increased $1.30 to $70.68 a barrel and natural gas prices increased 1 cent to $2.66 a thermal unit. 

 

U.S. Stock Movers

Alibaba Group Holding Ltd declined 2.2% to $90.10 after the company announced management shakeup. 

Co-founder Eddie Wu will succeed Daniel Zhang as chief executive of the company. 

 

European Markets Extend 2-day Losses 

European markets eased and investors focused on the region's economic health and digested the latest news from China. 

Benchmark indexes in Frankfurt, London and Paris declined for the second day this week after the widely anticipated rate cut in China failed to mist market sentiment. 

The Peoples' Bank of China lowered its loan prime rate by 10 basis points for 1-year to 3.65% and 5-year to 4.2%. 

Investors are also anticipating a 25-basis points rate hike by the Bank of England on Thursday. 

Closer to home, producer price inflation in Germany declined for the eighth month in a row 1.0% and dropped to the level last seen in January 2021.

The European Central Bank said adjusted current account surplus of 20-nation dropped to Є4 billion in April from Є31 billion in the previous month.  

 

German Producer Price Inflation Slowed to 28-month Low

Producer price inflation on an annual basis eased to 1% in May from 4.1% in April, the Federal Statistics Office or Destatis reported Tuesday. 

The inflation rate was the slowest since January 2021, after energy prices declined 3.3% from a year ago and fell 3.5% from the previous month. 

The sharp fall in energy prices by 34% since September 2022, helped to cushion price increases in capital goods and intermediate goods. 

On a monthly basis, inflation from April decreased 1.4% 

Prices for non-durable consumer goods were 10.1% higher in May and rose 0.1% from the previous month. Food prices were 11.9% from a year ago. 

Prices of durable consumer goods increased 7.9% compared to May 2022, mainly driven by an 8.8% increase in furniture prices and domestic appliances by 9.1%.

The 10.9% decline in metals prices drove down intermediate goods prices by 2.3% in May from a year ago.  

 

Swiss Trade Surplus Advanced to 15-month High 

Swiss trade surplus rose to CHF 4.3 billion in May from the revised 2.1 billion surplus in April, the Federal Customs Administration said Tuesday. 

The trade surplus was the largest since February 2022 because exports rose 7.8% to CHF 22.3 billion and imports declined 3.1% to a 17-month low of CHF 18.0 billion. 

Exports of chemicals and pharmaceuticals increased 15.1%, machinery and electronics 0..2%, watches 3.8%, food and beverages 5.6% and vehicles by 9.1%. 

Exports to the U.S. increased 7% to CHF 4.2 billion, China jumped 11% to CHF 1.4 billion, Germany 4% to CHF 3.5 billion and Slovenia soared 39% to CHF 1.5 billion and to India decreased 2.5% to CHF 152 million. 

Imports from Germany declined 5.1% to CHF 4.6 billion, Italy increased 0.3% to CHF 1.8 billion, declined 1.6% to CHF 1.5 billion, the U.S. jumped 9.8% to 1.2 billion and declined 12.9% to CHF194 billion. 

 

Europe Indexes & Yields 

The DAX index decreased 0.6% to 16,111.30,  the CAC-40 index declined 0.4% to 7,294.18 and the FTSE 100 index dropped 0.3% to 7569.31. 

The yield on 10-year German Bunds inched higher to 2.49%, French bonds traded lower to 3.00%, the UK gilts edged down to 4.46% and Italian bonds increased to 4.08%.

The euro edged lower to $1.09, the British pound to $1.27 and the Swiss franc to 89.70 cents.

Brent crude decreased $0.80 to $75.25 a barrel and the Dutch TTF natural gas decreased €2.28 to €37.19 per MWh.

 

Europe Stock Movers

Stellantis NV declined 2.2% to €15.39 after the Italian vehicle maker struck a 50:50 partnership with Foxconn to design and sell semiconductors for the automotive industry from 2026. 

Braemar Plc dropped 3.5% to 278.0 pence after the company said chief finance officer Nick Stone will step down on July 31. 

Abrdn Plc declined 1.1% to 213.20 pence after the company sold its 10% stake or 21.8 million shares in the India-based HDFC Asset Management Company. 

Monks  Investment Trust Plc  declined 0.1% to 994 pence after the company posted a smaller loss in the fiscal year 2023. 

Renault SA declined 3.9% to €35.45 and the company assigned additional responsibilities to group chief executive Luca de Meo as chairman and CEO of its electric vehicle unit Ampere.

Renault is still considering listing Ampere on the stock market. 

Sanofi SA increased 3.5% to €97.75 after the company won an international arbitration case related to claims by Boehringer Ingelheim in connection with cancer lawsuits linked to Zantac in the U.S.