Bond Market Volatility Leave the S&P 500 and Nasdaq Rudderless

Barry Adams
23 Oct, 2023
New York City

Stocks rebounded from morning weakness and advanced after the 10-year Treasury yield retreated from 5%.

Benchmark indexes advanced 0.5% after falling more than 2% in the previous week on worries that the Federal Reserve is more likely to lift rates than previously thought.

Traders bid up stocks, but the lingering worries of another rate hike and higher rates through 2024 kept enthusiasm for stocks in check.

For more than a year, investors held the belief that interest rates would begin to ease in the fourth quarter of this year, and rates were nearing their peak in the early summer.

The steady drumbeat of peak interest rates for three months beginning in May emboldened investors to increase exposure to high-growth and tech stocks.

However, investor sentiment began to shift after the Federal Reserve held rates steady last month and, more importantly, revised its estimate of GDP to just over 2% from the previous estimate of 1%.

The sharp revision of economic growth also suggested that the economy is resilient enough to withstand higher rates.

Policymakers are more likely to raise rates if inflation stays well above the Fed's target rate of 2% amid persistently tight labor market conditions and economic growth above 2%.

The good news on the economic front is bad news for the bond market because faster-than-expected economic growth along with tight labor conditions will more likely keep inflation above the Fed's target rate.

Moreover, the U.S. federal government budget deficit rose to $1.7 trillion in the fiscal year 2023 that ended in September, an increase of 23% from a year ago after revenue declined and federal expenses rose on the back of higher Social Security, Medicare, and Medicaid commitments.

Tax revenue declined more than 40% because of lower capital gains after the collapse of the stock market in 2022, and the Internal Revenue Service also extended tax deadlines to natural disaster-affected areas in California, Georgia, and Alabama.

Investors are also looking ahead to a barrage of earnings from leading tech companies, and at least 700 companies are scheduled to announce their quarterly results this week.

Alphabet, Amazon.com, Meta, and Microsoft are scheduled to report their quarterly earnings this week.

 

U.S. Indexes and Yields

The S&P 500 index increased 0.4% to 4,241.51, and the Nasdaq Composite rose 0.9% to 13,097.05.

The yield on 2-year Treasury notes increased to 5.06%, 10-year Treasury notes inched higher to 4.86%, and 30-year Treasury bonds edged up to 4.98%.

Crude oil decreased $2.45 to $85.57 a barrel, and natural gas prices rose 3 cents to $2.93 a thermal unit.

The dollar index edged higher to 106.09, the level last seen in November 2022, and extended gains from the low of 99.85 on July 13, 2023.

 

U.S. Stock Movers

Hess Corp. edged up 0.9% to $164.61 after the company agreed to an all-cash merger deal with Chevron for $171 a share, or $57 billion.

Chevron Corp. declined 2.2% to $163.12.

Apple Inc. declined 0.8% to $171.43 on the news that the Chinese government has opened a tax inquiry and land-use investigation for its largest supplier, Foxconn.

Taiwan-based Foxconn assembles many iPhone models in China and increasingly in India to diversify its production away from mainland China.

Stellantis NV edged up 0.9% to $19.05, and the United Auto Workers union said it plans to expand the strike to a plant in Michigan that produces Ram full-size pickup trucks.

The Sterling Heights, Michigan, plant has about 6,800 vehicle assembly workers.

 

Economic Worries and Rising Bond Yields Keep European Indexes Down

European markets extended the previous week's losses, and bond yields continued to advance.

Benchmark indexes in Paris, Frankfurt, and London fell between 0.3% and 0.7%, and bond yields in the Euro Area rose following the rise in 10-year U.S. Treasury notes.

European market indexes continued to drift lower on the rate uncertainties, looming economic slowdown and worries of resurgent inflation following the rebound in crude oil prices.

The European Central Bank's policy committee is scheduled to meet in Athens, and investors are anticipating no change in rates at the end of the meeting on Thursday.

However, the outlook for interest rates is highly uncertain because inflation is significantly ahead of 2%, despite multiple rate hikes by the European Central Bank and the Bank of England.

The rate uncertainties, combined with the recent rebound in crude oil prices, are keeping investors nervous as earnings season rolls on.

 

Europe Indexes and Yields

The DAX index increased 0.02% to 14,800.72, the CAC-40 index rose 0.5% to 6,850.47, and the FTSE 100 index dropped 0.4% to 7,374.83.

The yield on 10-yetrar German bonds increased to 2.94%, French bonds traded higher to 3.56%, the UK gilts edged up to 4.70%, and Italian bonds eased to 4.95%.

The euro hovered near a three-month low at $1.06, the British pound at $1.216, and the U.S. dollar at 89.20 Swiss cents.

Brent crude decreased $2.48 to $89.68 a barrel, and the Dutch TTF natural gas edged lower by €1.39 to €49.73 per MWh.

 

Europe Stock Movers

In Paris trading, banks led the decliners on the worries of higher interest rates, adding to the losses in bond portfolios held by banks.

BNP Paribas, Societe Generale, and Credit Agricole traded between -0.3% and 0.3%.

Renault SA extended losses to the second week and fell 1.5% to €32.74 after currency losses in Turkey and Argentina overwhelmed the overall results.

Mining and energy companies led the decline in London trading after market indexes in Shanghai, Shenzhen, and Hong Kong dropped to multi-month lows.

Anglo American, Antofagasta, Glencore, and Fresnillo dropped between 1% and 2.5%.

Homebuilders were also among the leading decliners in London trading after bond yields advanced in the U.K. and raised the prospect of another cycle of mortgage rate hikes.

In Frankfurt, Commerzbank and Deutsche Bank were among the leading decliners, with losses of 0.4%.

Vehicle makers were among the leading decliners on the twin worries of a looming global economic slowdown and rising competition from electric vehicle makers in China.

Volkswagen Group declined 1.6% to €101.50, Mercedes Benz dropped 0.5% to €61.46, and Porsche Automobil Holding SE fell 2.2% to €43.62.