Stocks Rally as Bond Yields Plunge on BOE Bond-Buying

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Wednesday closed up +1.97%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +1.88%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.97%.

Stocks on Wednesday rallied sharply on a plunge in T-note yields. Stock indexes recovered from overnight losses on a drop in global bond yields after the Bank of England (BOE) unexpectedly ramped up QE.

The 10-year T-note yield Wednesday fell from a 14-year high of 4.015% and fell sharply by -25.2 bp to 3.693%.  The 10-year UK gilt yield fell back from a 14-year high of 4.591% and plunged -49.4 bp to 4.012%.

The BOE announced Wednesday that it would buy long-dated government bonds beginning Wednesday "to restore orderly market conditions.  The bond purchases will be carried out on whatever scale is necessary to effect this outcome."  The BOE’s rescue-action action Wednesday sparked a rally in global government bond markets as the markets hoped that other key central banks might also question the extent of their tightening regimes. 

A rally in health care stocks Wednesday gave the overall market a boost as Biogen surged more than +39% when it said its Lecanemab drug developed with Eisai Co significantly slowed the progression of Alzheimer’s disease.

U.S. stock indexes initially fell in overnight trading on weakness in chip stocks, with Apple down more than -3% after a Bloomberg report said the company is backing off plans to increase production of its new iPhones this year after an anticipated surge in demand failed to materialize. 

The U.S. Aug advance goods trade balance deficit of -$87.3 billion was narrower than expectations of -$89.0 billion and the smallest deficit in 10 months.

U.S. Aug wholesale inventories rose +1.3% m/m, more than expectations of +0.4% m/m.  Also, Aug retail inventories rose +1.4% m/m, more than expectations of +1.0% m/m.  The buildup of inventories is a negative factor for the economy since it suggests that production will need to slow to match demand.

U.S. Aug pending home sales fell -2.0% m/m, weaker than expectations of -1.5% m/m.

Hawkish comments Wednesday from Atlanta Fed President Bostic were bearish for stocks when he said, "the lack of progress on inflation thus far has me thinking much more now that we have to get to a moderately restrictive stance.  My preference is that we get the fed funds target range to 4.25% to 4.50% by year-end."

Today’s stock movers…

Homebuilders rallied Wednesday after the 10-year T-note yield fell sharply by -25.2 bp to 3.693%, which is positive for mortgage rates.  DR Horton (DHI), Lennar (LEN), Toll Brothers (TOL), and PulteGroup (PHM) all closed up more than +5%. 

A jump of more than +4% in crude oil prices Wednesday sparked a rally in energy stocks and energy service providers.  Marathon Petroleum (MPC), Hess Corp (HES), and Valero Energy (VLO) closed up more than +7%.  Also, Phillips 66 (PSX), Devon Energy (DVN), and APA Corp (APA) closed up more than +6%.  In addition, Marathon Oil (MRO) and Diamondback Energy (FANG) closed up more than +5%. 

Biogen (BIIB) closed up by more than +39% Wednesday to lead gainers in the S&P 500 and Nasdaq 100 after the company reported the drug Lecanemab it is developing with Eisai Co. showed it reduced the pace of cognitive decline in people with early stages of Alzheimer’s disease by 27% over 18 months when compared with a placebo.  Eli Lilly (LLY) is also up more than +7% on the news.

Netflix (NFLX) closed up more than +9% Wednesday after Atlantic Equities upgraded the stock to overweight from neutral, citing the outlook for the company’s new ad-supported tier.

Home Depot (HD) closed up more than +5% Wednesday to lead gainers in the Dow Jones Industrials on the outlook for a surge in sales for the company from rebuilding/repair in the wake of Hurricane Ian.  Also, Floor & Decor Holdings (FND) closed up more than +7%, and Lowe’s (LOW) closed up more than +3%.

Illumina (ILMN) closed up more than +7% Wednesday after Evercore ISI upgraded the stock to outperform from in-line.

Apple (AAPL) closed down more than -1% Wednesday to lead losers in the Dow Jones Industrials and the Nasdaq 100 after a Bloomberg report said the company is backing off plans to increase production of its new iPhones this year after an anticipated surge in demand failed to materialize.  Suppliers to Apple also fell on the report, with Qualcomm (QCOM) closing down more than -1% and Skyworks Solutions (SWKS) closing down nearly -0.3%.

VF Corp (VFC) closed down more than -6% Wednesday to lead losers in the S&P 500 after it cut its 2023 adjusted EPS forecast to $2.60-$2.70 from a prior estimate of $3.05-$3.15, weaker than the consensus of $3.04. 

Across the markets…

Dec 10-year T-notes (ZNZ22) on Wednesday closed up +1-31/32 points, and the 10-year T-note yield fell -25.2 bp to 3.692%.  Dec T-notes Wednesday rebounded sharply from a nearly 15-year nearest-futures low, and the 10-year T-note yield fell back from a 14-year high of 4.015%.

A plunge in UK government bond yields sparked a rally in T-notes.  The 10-year UK gilt yield retreated from a 14-year high Wednesday of 4.591% and sank -49.4 bp to 4.012% after the BOE ramped up QE.  The BOE said that it will buy long-dated government bonds beginning Wednesday " in whatever quantities needed to restore orderly market conditions.” 

T-note prices also found support Wednesday from strong demand for the Treasury’s $36 billion 7-year T-note auction that had a bid-to-cover ratio of 2.57, above the 10-auction average of 2.46.

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