After Rallying for Days, Caution Returned to Trading Amid Worries About Real Estate Sector

Barry Adams
06 Nov, 2023
New York City

Market indexes on Wall Street turned lower, and bond yields extended the previous week's decline after interest rate uncertainties eased.

Benchmark indexes erased morning gains in Monday's trading, and the market mood turned to caution after three hours of trading, as investors took a breather after the best weekly performance last week in 2023.

The S&P 500 index and the Nasdaq Composite advanced 5% in the previous week, the best weekly gains since November 2022.

Investors returned to add stock exposure in the hopes that the Federal Reserve is done raising interest rates for now and may hold rates for the third time at the next and final rate-setting meeting on December 13.

Market sentiment was bolstered after the 10-year Treasury note yield trended lower from the 16-year high of 5% after expectations rose that the Federal Reserve would hold rates steady till the first two-day meeting of 2024 ending on January 31.

Last week, a softer increase in nonfarm payroll in October supported the Fed's case for a rate hike pause. further emboldening investors to increase stock exposure.

In Monday's trading, benchmark indexes advanced for the fifth day in a row on stable rates, improving earnings, and stronger-than-expected economic growth driven by resilient consumer spending and not-too-tight labor conditions, which are also supporting the rise in stock market indexes.

But worries about stretched valuations and the impact of a surge in interest rates on interest-sensitive sectors like real estate dragged the indexes lower.

The commercial real estate sector is taking a large hit since interest rates have surged from near zero to 5.5% in the last eighteen months.

Moreover, the residential real estate market is also facing tough headwinds after mortgage rates jumped to 15-year highs and existing home sales transactions in October dropped to the annual pace of 3.9 million, the level last seen in 2007-8 housing market crisis. 

 

U.S. indexes and Yields

The S&P 500 index decreased 0.2% to 4,351.22, and the Nasdaq Composite declined 0.2% to 13,446.85.

The yield on 2-year Treasury notes increased to 4.88%, 10-year Treasury notes inched higher to 4.60%, and 30-year Treasury bonds edged down to 4.78%.

Crude oil increased $1.40 to $81.91 a barrel, and natural gas prices fell 25 cents to $3.25 a thermal unit.

Gold decreased $10.46 to $1,981.92 an ounce after bond yields edged lower and the dollar weakened.

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 104.95.

 

U.S. Stock Movers

Citigroup added 0.1% to $42.31, and the bank is looking to trim as many as 10,000 jobs from its total payroll of 240,000.

The news was first reported by CNBC without naming sources.

Berkshire Hathaway Class B increased 0.6% to $353.99 after the reinsurance insurance-anchored diversified conglomerate reported a surge in quarterly profits.

Operating earnings in the third quarter increased 40% to $10.76 billion from $7.6 billion, driven by a sharp increase in its insurance business.

Insurance underwriting swung to a profit of $2.4 billion from a loss of $1.07 billion, and insurance investment income soared to $2.5 billion from $1.4 billion a year ago.

Investment income jumped after interest rates jumped in the twelve-month period to the end of the third quarter, after the Federal Reserve carried out its aggressive rate hike campaign between March 2022 and June 2023.

Total revenues increased to $93.2 billion from $76.9 billion, net loss attributable to shareholders increased to $12.7 billion from $2.7 billion, and diluted loss per Class A share increased to $8,824 from $1,907 a year ago.

Based on GAAP accounting, net income also reflected the quarterly unrealized investment losses of $29.8 billion compared to $13.5 billion in the corresponding quarter a year ago.

Cash and equivalent securities held by the company at the end of September jumped to $157.2 billion from $128.5 billion a year ago.

 

European Markets Halted 5-day Rally, Bond Yields Drifted Lower 

European markets lacked direction in Monday's trading following a 5-day rally.

In cautious market sentiment, stocks drifted lower and bond yields continued to slide for the second week in a row after interest rate uncertainties eased following the rate hike pause in the U.S. and U.K.

Investors are struggling to recalibrate expectations in the face of a looming economic slowdown, tight labor market conditions, and rising interest rates driven by elevated inflation.

Inflation has been falling in the Euro Area, and consumer price inflation has steadily declined from a peak of 10.1% in November 2022 to 2.9% in October.

The European Central Bank has raised interest rates several times, but consumer inflation is still higher than the target rate of 2%. The recent decrease in inflation is due to lower energy prices and a higher base for the previous year.

Market indexes in Frankfurt, London, and Paris edged slightly lower, and investors reviewed updates on the UK's construction industry, German factory orders, and eurozone business activity.

 

German Factory Orders Advanced In September

German factory orders adjusted for seasonal factors, and the calendar unexpectedly rose 0.2% from the previous month in September, the Destatis reported Monday.

Factory orders fell 4.3% from a year ago.

August orders were downwardly revised to a 1.9% increase from the previous estimate of 3.9% following the revision of incorrect data in the manufacturing of electronic, optical, and computer products.

Domestic orders fell 5.9% and foreign orders were up 4.2%, after orders in the eurozone increased 6.2% and orders from the rest of the world rose 2.9%.

In other economic news, the HCOB Eurozone PMI compiled by S&P Global declined to 46.5 in October from 47.2 in September, the weakest reading since November 2020.

The purchasing managers' index highlighted different conditions in Spain and Italy.

The PMI for Spain in October was little changed at 50.0 from 50.1 in September, indicating stable conditions in the country.

The service PMI for Italy in October decreased to 47.7 from 49.9 in September, and the index contracted at the fastest pace in a year because of a decline in service output and activity.

The U.K. construction PMI rose to 45.6 in October from 45.0 in September, reflecting ongoing weakness in residential construction.

Home building declined for the eleventh month in a row, and civil construction activities declined at the sharpest pace since July 2020.

 

Europe Indexes and Yields

The DAX index decreased 0.3% to 15,135.95, the CAC-40 index fell 0.5% to 7,013.73, and the FTSE 100 index was flat at 7,417.76.

The yield on 10-year German bonds decreased to 2.70%, French bonds traded lower to 3.29%, the UK gilts edged down to 4.33%, and Italian bonds inched higher to 4.52%.

The euro rebounded to $1.075, the British pound at $1.242, and the U.S. dollar at 89.61 Swiss cents.

Brent crude increased $0.96 to $85.85 a barrel, and the Dutch TTF natural gas edged lower by €3.23 to €44.83 per MWh.

 

Europe Stock Movers

Telecom Italia SpA declined 0.3% to €0.25 after the company agreed to sell its landline business to the U.S.-based private equity group KKR LP for €19 billion.

PostNL NV dropped 11% to €1.59 after the Dutch parcel delivery company reported a quarterly loss and forecasted annual profit to fall near the low end of its previous estimate.

Ryanair Holdings plc increased 6.6% to €16.21 after the discount airline forecasted a record annual profit and indicated its plan to pay a regular dividend.

Scottish Mortgage Investment Trust PLC declined 0.5% to 684.48 pence after the company reported a decline in net asset value in the first half of the fiscal year.

Prudential plc decreased 0.8% to 892.60 pence after the insurance company reported a slower pace of growth in the third quarter from the previous quarter.

Melrose Industries PLC rose 3.5% to 507.0 pence after the company's unit, GKN Aerospace, signed a new agreement with GE Aerospace.