Market Selloff Accelerates With Looming Federal Government Shutdown

Barry Adams
26 Sep, 2023
New York City

Worries of the U.S. economy's health resurfaced and investors sold stocks after new home sales fell at the sharpest pace in eleven months. 

Stocks resumed downward slide and extended previous week's losses and reversed gains in Monday's trading and investors reassessed housing market health and its impact on the economy. 

Benchmark indexes fell more than 1.5% as fears of rising rates gripped market sentiment and investors sold high growth and tech stocks after new home sales fell at a faster pace. 

Investors have been bidding stocks up for the first six months of the year on the hopes that interest rates are closer to peak rates. 

However, investors changed their views on interest rate trajectory two weeks later and finally accepted the Fed's forward projections on interest rates. 

So what convinced investors, the Fed's forward projections released at the time of announcing rate decision after the two-day meeting, suggested at least one more rate hike this year, and fewer rate cuts in 2024. 

Moreover, the rebound in crude oil prices also contributed to the market sentiment turning bearish on bonds. 

With yields on 2-year and 10-year Treasury notes at 16-yea highs and 30-year Treasury bonds at 11-year highs, higher rates are beginning to have impact on stock valuations. 

However, despite multiple rate hikes, the U.S. economy is still expected to grow at 2.1% in 2023, according to the Fed's latest projection, sharply higher than the previous estimate of 1%, release in June. 

But investors decided to focus on the Fed's higher-for-longer stance and overlooked the resilient economy and strong labor market conditions. 

Moreover, the potential U.S. government shutdown and higher crude oil prices also weighed on market sentiment. 

The U.S. federal government is expected to run out of cash if the Congress fails to pass the fiscal year budget on October 1. 

Moody's Investors Service said on Monday that the U.S. federal government shutdown will be "credit negative" and could hamper the country's AAA rating, and may push bond yields higher. 

"In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability," Moody's said in a statement. 

In Wednesday's trading, all sectors declined and technology and consumer discretionary sectors led with losses of 1.4% but energy and healthcare sectors lagged the market decline with losses of 0.3%. 

 

New Home Sales Declined In August 

New single-family home sales declined 8.7% to a seasonally adjusted annualized rate of 675,000 in August, the Commerce Department reported today.  

Home sales fell the most in 11 months from the upwardly revised 8% jump in the previous month. 

The median price of new home sold was $430,300 and the average sales price was $514,000, lower than $440,300 and $530,800 respectively, a year ago.

Sales plunged in the Midwest by 17.2% to 77,000, the West by 9.4% to 183,000 and the South by 7.5% to 383,000 but rose in the Northeast by 6.7% to 32,000. 

 

U.S. Indexes & Yields 

The S&P 500 index decreased 1.4% to 4,278.48 and the Nasdaq Composite fell 1.5% to 13,082.56. 

The yield on 2-year Treasury notes hovered at 5.16%, 10-year Treasury notes inched higher to 4.55% and 30-year Treasury bonds edged up to 4.68%. 

Crude oil increased $0.77 to $90.45 a barrel and natural gas prices declined 1 cent to $2.62 a thermal unit. 

The dollar index edged higher to 106.20, the level last seen in November 2022 and extended gains from the low of 99.85 on July 13, 2023.  

 

U.S. Stock Movers 

Thor industries rose 1.% to $95.68 after the company reported revenue declined 28.4% in its latest quarter of $2.74 billion. 

Net income in the quarter declined to $90.3 million from $280.9 million and diluted earnings per share fell to $1.68 from $5.15 a year ago.  

The company also forecasted revenue to decline in the next fiscal year to between $10.5 billion and $11.0 billion from $11.2 billion in fiscal 2023. 

United Natural Foods Inc dropped 23% to $14.44 after the company reported weaker-than-expected sales in its latest quarter and forecasted additional weakness in sales and operating earnings in the current quarter. 

 

Surging Bond Yields Roiled European Stocks and Currencies 

European markets retained downward bias and investors debated interest rate path and the impact of higher rates on the economy. 

Benchmark indexes in Frankfurt, and Paris edged lower but in London traded higher and investors reacted to growing global uncertainties. 

Chinese property market worries were in forefront after the most-indebted property group in the world and the largest Chinese property developer faced more headwinds in restructuring its debt. 

China Evergrande said its listed subsidiary Hengda Real Estate defaulted on a 4 billion yuan or $547 million loan principal and interest payment.  

Moreover, the potential U.S. government shutdown and higher crude oil prices also weighed on market sentiment. 

The U.S. federal government is expected to run out of cash if the Congress fails to pass the fiscal year budget on October 1. 

Moody's Investors Service said on Monday that the U.S. federal government shutdown will be "credit negative" and could hamper the country's AAA rating, and push bond yields higher. 

"In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability," Moody's said in a statement. 

 

Europe Indexes & Yields

The DAX index decreased 1% to 15,255.87, the CAC-40 index fell 0.7% to 7,074.02 and the FTSE 100 index added 0.02% to 7,625.72. 

The yield on 10-year German bonds decreased to 2.77%, French bonds traded lower to 3.32%, the UK gilts edged down to 4.28% and Italian bonds rose to 4.67%.

The euro edged lower to a three-month low to $1.060, the British pound to $1.218 and the U.S. dollar fetched 91.22 Swiss cents.

Natural gas prices eased after rallying for five days in a row amid supply worries, despite elevated inventories in the region. 

Yesterday, Norway's Gassco extended production shutdown at its Skarv field by a week to October 8. 

Investors have been bidding up prices on the production disruptions worries by extreme weather events and prolonged outages at the U.S. LNG shipment terminals amid ongoing Russia's invasion of Ukraine. 

Brent crude decreased $0.84 to $94.12 a barrel and the Dutch TTF natural gas edged higher €4.12 to €40.32 per MWh.

 

Europe Stock Movers 

Rheinmetall AG advanced 0.2% to €249.20 after the German automotive and arms maker won orders from two companies totaling several hundred million euros. 

Origin Enterprises Plc jumped 6% to €3.34 despite the company reporting lower profit before tax in the fiscal year 2023. 

ASOS Plc decreased 2.7% to 377.60 after the online apparel and fashion retailer reported a decline in sales in the fiscal fourth quarter and warned that net income is likely to be near the bottom end of its estimate. 

Smiths Group plc declined 1.5% to 1,649.0 pence despite the engineering services company reporting record operating profit in the year ending in July. 

Luxury stocks declined for the second day in a row after China property woes deepened and dampened hopes of a speedy economic recovery. 

LVMH, Kering, Hermes and Richemont declined between 1% and 3%.