What you need to know…
The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +1.83%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.40%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +2.07%.
Stocks on Wednesday rallied sharply. A decline in T-note yields Wednesday gave equities a boost after the 10-year T-note yield fell -8.0 bp to 3.269%. Also, a rally in renewable energy stocks, airlines, and cruise operators supported the overall market. Finally, comments Wednesday from Cleveland Fed President Mester were bullish for stocks when she said she doesn't have a recession in her baseline outlook.
Stocks still have negative concerns about global growth after Wednesday’s China trade news showed China Aug exports and imports were weaker than expected. Another negative factor for the overall market was weakness in energy stocks, after the price of WTI crude on Wednesday plunged more than -5% to a 7-3/4 month low.
Wednesday’s U.S. economic news was bearish for stocks. The July trade deficit of -$70.7 billion was wider than expectations of -$70.2 billion, which has negative implications for Q3 GDP.
The Fed Beige Book was mixed for stocks as the report showed a weak U.S. growth outlook with inflation cooling. The Fed Beige book said, "the outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months." Price levels "remained highly elevated," but nine of 12 Fed districts reported some degree of moderation in their rate of increase.
Fed comments Wednesday were mostly hawkish for Fed policy and bearish for stocks. Fed Vice Chair Brainard said the Fed is in it for "as long as it takes" to curb inflation, and "monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target." Also, Cleveland Fed President Mester said she doesn't have a recession in her baseline outlook and reiterated that she backs hiking the fed funds rate above 4% by early 2023 and leaving it there for some time to combat inflation. In addition, Richmond Fed President Barkin said the Fed must raise interest rates to a level that restrains economic activity and keep them there until policymakers are "convinced" that inflation is subsiding.
Goldman Sachs said the rally in stocks that began in mid-June was a "bear market rally," and they expect "further weakness and bumpy markets before a decisive trough is established."
Today’s stock movers…
Renewable energy stocks rose Wednesday after Morgan Stanley on Tuesday raised its rating on the sector to overweight. SolarEdge Technologies (SEDG) closed up more than +11% to lead gainers in the S&P 500. Also, Enphase Energy (ENPH) closed up more than +8%, and NextEra Energy (NEE) closed up more than +3%.
Cruise line operators rallied Wednesday on signs of stronger cruise demand after UBS said “one of the largest U.S. cruise sellers” told them that since vaccine and testing requirements have been dropped, there has been strong demand for last-minute sailings. As a result, Norwegian Cruise Line Holdings (NCLH) closed up more than +5%, and Carnival (CCL) and Royal Caribbean Cruises (RCL) closed up more than +4%.
Airline stocks rallied Wednesday after United Airlines Holdings raised its outlook for Q3 sales and said it might fly slightly more than previously planned. United said operating revenue would be up 12% in Q3 compared with the same period in 2019, higher than a previous forecast of 11%. As a result, United Airlines Holdings (UAL) and American Airlines Group (AAL) closed up more than +5%. Also, Alaska Air Group (ALK) closed up more than +4%. In addition, Delta Air Lines (DAL) closed up by more than +3%, and Southwest Airlines (LUV) closed up by more than +2%.
A slump of more than -5% in WTI crude prices Wednesday to a 7-3/4 month low weighed on energy stocks and energy service providers. APA Corp (APA) closed down more than -3% to lead losers in the S&P 500. Also, Baker Hughes (BKR), Haliburton (HAL), Marathon Oil (MRO), and Occidental Petroleum (OXY) closed down by more than -2%. In addition, Diamondback Energy (FANG), Devon Energy (DVN), and ConocoPhillips (COP) closed down by more than -1%. Finally, Chevron (CVX) closed down more than -1% to lead losers in the Dow Jones Industrials.
Old Dominion Freight Line (ODFL) closed down more than -2% Wednesday to lead losers in the Nasdaq 100 after KeyBanc Capital Markets lowered its Q3 estimate for Old Dominion to $3.04 from $3.22 after the company reported disappointing shipments for August.
UiPath (PATH) closed down more than -11% Wednesday after forecasting Q3 revenue of $243 million-$245 million, weaker than the consensus of $269.5 million. Morgan Stanley subsequently downgraded the stock to equal weight from overweight.
Across the markets…
Dec 10-year T-notes (ZNZ22) on Wednesday closed up +18.5 ticks, and the 10-year T-note yield fell -8.0 bp to 3.269%. Dec T-notes recovered from a 2-1/2 month low posted in the overnight session, and the 10-year T-note yield fell back from a 2-1/2 month high of 3.361%. Lower European government bond yields Wednesday provided carry-over support for T-note prices. Also, short-covering in T-notes emerged after a more than -5% plunge in crude prices Wednesday to a 7-3/4 month low weakened inflation expectations.
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