Stocks Tumble on China Pandemic Woes and Hawkish Fed Comments

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday fell -1.54%, the Dow Jones Industrials Index ($DOWI) (DIA) fell -1.45%, and the Nasdaq 100 Index ($IUXX) (QQQ) fell -1.43%.  

Stocks on Monday posted moderate losses on concern a worsening pandemic in China will prompt the government to tighten lockdowns and restrictions, undermining the prospects for global growth.   Sporadic nationwide protests in China have broken out in recent days over the government’s strict Covid Zero policies.  China reported a record 38,808 new Covid infections on Sunday.

Also, a fall of more than -2% in Apple Monday weighed on technology stocks after a Bloomberg report said that lockdowns and turmoil at a key Chinese factory could lead to a production shortfall of close to 6 million iPhone Pro units this year.

Stocks sank to the lows Monday after T-note yields moved higher on hawkish comments from several Fed members who stressed that interest rates would continue to rise to combat inflation.  As a result, the 10-year T-note yield jumped from a 7-week low of 3.619% and rose +2.2 bp to 3.700%.

New York Fed President Williams said, "stronger demand for labor, stronger demand in the economy than I previously thought, and then somewhat higher underlying inflation, suggest a modestly higher rate path than I had forecast in September." 

St. Louis Fed President Bullard said the markets are underpricing the risk that the FOMC may be more aggressive than the markets currently expect, and that the Fed may have to keep interest rates higher through 2023 into 2024 as inflation remains "far too high."

Cleveland Fed President Mester said the Fed is "not near a pause" in its rate hikes, but "we have the opportunity to slow the pace of increases and evaluate the effects, given that we're beginning to move into restrictive territory."   

Bitcoin (^BTCUSD) fell more than -1% Monday and added to woes in U.S. equity markets.  Bitcoin prices tumbled Monday as BlockFi Inc became the latest crypto lender to file for bankruptcy.  The bankruptcy petition filed in New Jersey on Monday listed BlockFi’s assets and liabilities at between $1 billion and $10 billion each.  BlockFi had significant exposure to FTX.com and had collateralized loans to Almeda Research, the trading firm of FTX.com. 

Monday’s economic news was supportive for stocks after the Nov Dallas Fed manufacturing activity unexpectedly rose +5.0 to -14.4, stronger than expectations of a decline to -21.0.

Today’s stock movers…

Higher bond yields and global economic concerns led to the selling of chip stocks that weighed on the technology sector Monday. NXP Semiconductors NV (NXPI), ON Semiconductors (ON), and Micron Technology (MU) closed down more than -4%.  Also, Qualcomm (QCOM) closed down more than -3%.  In addition, Nvidia (NVDA), Advanced Micro Devices (AMD), Intel (INTC), Align Technology (ALGN), Lam Research (LRCX), Applied Materials (AMAT), and Texas Instruments (TXN) closed down more than -2%.

TransDigm Group (TDG) closed down more than -4% after Wells Fargo Securities downgraded the stock to equal weight from overweight.

Biogen (BIIB) closed down more than -4% after a second death was reported linked to Biogen’s experimental drug for Alzheimer’s disease the company is developing with Eisai Co. 

Apple (AAPL) closed down more than -2% on a Bloomberg report that said lockdowns and turmoil at a key Chinese factory could lead to a production shortfall of close to 6 million iPhone Pro units this year.

Williams-Sonoma (WSM) closed down more than -4% after Morgan Stanley downgraded the stock to underweight from equal weight.

Tyson Foods (TSN) closed down more than -2% after Barclays downgraded both stocks to underweight from equal weight. 

Catalent (CTLT) closed up more than +13% to lead gainers in the S&P 500 after a Barclays analyst said the FDA cleared Form 483 inspection letters for the company’s Brussels and Bloomington facilities without warning letters, which had been an overhang on the stock recently. 

Wynn Resorts (WYNN) closed up more than +4% after JPMorgan Chase upgraded the stock to overweight from neutral. 

Activision Blizzard (ATVI) closed up more than +1% after Wells Fargo Securities upgraded the stock to overweight from equal weight.

U.S.-listed Chinese stocks moved higher Monday as Pinduoduo surged after reporting better-than-expected earnings.  Pinduoduo (PDD) closed up more than +12% to lead gainers in the Nasdaq 100 after reporting Q3 revenue of 35.50 billion yuan, well above the consensus of 30.90 billion yuan.  Other U.S.-listed Chinese stocks also rallied on the news, with NetEase (NTES) up more than +2%, Baidu (BIDU) up more than +1%, JD.com (JD) up +0.87%, and Alibaba Group Holding (BABA) up +0.50%. 

Across the markets…

Dec 10-year T-notes (ZNZ22) Monday closed down -3.5 ticks, and the 10-year T-note yield rose +2.2 bp to 3.700%.  T-note prices Monday fell back from a 7-week high, and the 10-year T-note yield rose from a 7-week low of 3.619%.  T-notes Monday gave up early gains and moved lower on hawkish comments from several Fed presidents who stressed that more interest rate hikes were coming.  T-notes Monday initially moved higher on a slump in stocks and global growth concerns due to record Covid infection in China. 

T-note prices Monday also had negative carry-over from higher European government bond yields.  The 10-year German bund yield Monday rose +1.7 bp to 1.992%, and the 10-year UK gilt yield rose +0.3 bp to 3.126%. 

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