Stocks Sink on Crypto Turmoil and Chinese Covid Spike

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday fell -0.39%, the Dow Jones Industrials Index ($DOWI) (DIA) fell -0.13%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell -1.06%.  

Stocks fell on Monday on fears of fresh Chinese lockdowns after the first Chinese Covid death in almost six months was reported on Saturday, and two more deaths were reported on Sunday.  China reported 23,238 new Covid infections on Saturday, down slightly from Friday.

 

Stocks were also undercut by a risk-off atmosphere as bitcoin (^BTCUSD) fell -3.8% on fears of more fall-out from the FTX debacle.  Digital-asset brokerage Genesis said Monday it is still trying to raise capital but that bankruptcy is a possibility after the firm was recently forced to suspend withdrawals from its lending unit because it had substantial funds locked up in the FTX bankruptcy.

Stocks temporarily saw some support when San Francisco Fed President Mary Daly mentioned the need for mindfulness about the possibility of tightening too much. The markets are already expecting the Fed to go too far with a hike of about another 125 bp through mid-2023, with the Fed then being forced into a -25 bp rate cut during late-2023 to address a weak economy.  Still, Ms. Daly said she tends to be on the hawkish side of the Fed and that she still thinks the funds rate needs to get to at least 5%.

Ms. Daly said, “As we work to bring policy to a sufficiently restrictive stance – the level required to bring inflation down and restore price stability – we will need to be mindful.  Adjusting too little will leave inflation too high.  Adjusting too much could lead to an unnecessarily painful downturn.”  The markets are hoping that more Fed officials will start mentioning the risks of tightening too far given that monetary policy acts with long and variable lags.

Meanwhile, Cleveland Fed President Loretta Mester also delivered dovish remarks when she said, “I think we can slow down from the 75 at the next meeting, I don’t have a problem with that.”  She said that policy was entering a new “cadence” now that rates have entered restrictive territory.  The markets are expecting the FOMC at its next meeting on December 13-14 to downshift to a +50 bp rate hike from the +75 bp rate hike seen at each of the last four FOMC meetings.

Stocks were undercut Monday by renewed fears of a railroad strike in two weeks after one of the largest railroad unions voted down the deal proposed by the White House.  The SMART Transportation Division, the union representing rail conductors, announced Monday that it voted down the deal.  By contrast, the Brotherhood of Locomotive Engineers and Trainmen on Monday announced they voted to ratify the deal.  In recent weeks, seven of 12 railroad unions approved the deal, but three unions have rejected their contracts.  Railroad workers would be allowed to strike beginning at midnight on December 5.  Still, Congress has the power to intervene with legislation to prevent a strike.

Stocks were also undercut after Goldman strategists delivered a bearish stock view in a note Monday by saying, “The conditions that are typically consistent with an equity trough have not yet been reached.”  The strategists said that a peak in interest rates and recession-level valuations are necessary for a sustained stock-market recovery.  They said, “The near-term path for equity markets is likely to be volatile and down.”

Today’s stock movers…

Disney (DIS) rallied +6.65% on Monday on the surprise news that Bob Iger will come back as CEO for a 2-year term while the board looks for a permanent replacement for former CEO Bob Chapek.  The Disney board is responding to disappointing earnings results and losses at the Disney+ streaming service.

Energy stocks weighed on the broad market after a volatile trading day in WTI crude oil prices, which closed the day down -0.44% after being down as much as -6% earlier in the day:  Exxon (XOM) -0.66%, Marathon Oil (MRO) -2.14%, Valero Energy (VLO) -0.87%, Haliburton (HAL) -1.25%, and Schlumberger  (SLB) -1.86%.

Tesla (TSLA) fell to a new 2-year low and closed down -6.52% as investors worried about a large recall and CEO Musk’s ongoing diversion at Twitter.  The National Highway Safety Administration on Saturday said that Tesla was recalling 321,628 vehicles due to a tail-light illumination issue.

Crypto stocks traded lower due to the -3.8% sell-off in bitcoin (^BTCUSD) and the worries about continuing fall-out from the recent FTX collapse.  Coinbase (COIN) on Monday fell to a new record low and closed the day down -8.60%. Credit distress in Coinbase can been seen by the fact that its senior unsecured notes are trading in the low- to mid-50 cents on the dollar, with a yield of 13-15%.

Other crypto stocks also closed sharply lower:  Marathon Digital (MARA) -16.86%, and Riot Blockchain (RIOT) -10.46%.

Carvana (CVNA) fell -12.24% after Argus Research downgraded the stock to sell on falling used car prices.

U.S.-listed Chinese stocks traded lower due to fears about the Covid spike in China:  Alibaba (BABA) -4.41%, JD.com (JD) -6.37%, Nio (NIO) -4.30%, and Xpeng (XPEV) -5.67%.

U.S.-listed Macau casino operators fell after Macau officials imposed a new Covid testing requirement on visitors from mainland China: Wynn Resorts (WYNN) -1.86%, Las Vegas Sands (LVS) -2.54%, MGM Resorts (MGM) -2.34%, and Melco Resorts and Entertainment (MLCO) -8.08%.

Across the markets…

Dec 10-year T-notes (ZNZ22) Monday closed +0.5 tick, and the 10-year T-note yield fell -0.2 bp to 3.827%.  T-note prices saw support from weakness in stocks, crypto turmoil, and from expectations about weaker Chinese economic growth with its Covid spike.  T-note prices also saw support from slightly dovish comments from Fed presidents Daly and Mester. 

On the bearish side, the 10-year breakeven inflation expectations rate Monday rose sharply by +7 bp to 2.34%.  Also, there were supply pressures as the Treasury on Monday sold $42 billion of 2-year T-notes and $43 billion of 5-year T-notes.  The Treasury will wrap up this week’s T-note package by selling $35 billion of 7-year T-notes on Tuesday.

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