Stocks Tumble as Debt-Ceiling Deadline Looms

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday closed down -1.12%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.69% and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.28%.

Stock indexes Monday posted moderate losses as U.S. debt ceiling talks drag on.  President Biden and House Speaker McCarthy continued their talks Tuesday, although McCarthy said the two sides are “not anywhere near close” to a deal.  On Monday, Treasury Secretary Yellen warned it’s “highly likely” her department would run out of sufficient cash in early June, and that default could come as soon as June 1.

U.S. stock indexes were also under pressure Tuesday on negative carryover from a decline in European stocks after the news that manufacturing activity in the Eurozone in May unexpectedly contracted by the most in 3 years.

Comments Tuesday from Minneapolis Fed President Kashkari were hawkish for Fed policy and weighed on stocks when he said, "If inflation became more entrenched than we realized, then we're going to have to keep interest rates high for longer."

Global bond yields Tuesday were mixed.  The 10-year T-note yield climbed to a 2-1/4 month high of 3.757% but fell back and finished down -1.5 bp at 3.700%.  The 10-year German bund yield rose +1.0 bp to 2.469%, and the UK 10-year gilt climbed to a 7-1/4 month high of 4.187% and rose +9.5 bp to 4.158%.

On the bearish side for stocks, Zoom Video Communications closed down more than -8% after reporting fewer than expected Q1 enterprise customers and weaker than expected Q1 cash and cash equivalents.  Also, AutoZone closed down more than -5% after reporting Q3 net sales that were below consensus.  In addition, Brown & Brown closed down more than -3% after it announced it entered into an agreement to buy Kentro Capital Limited.

On the bullish side, Moderna closed up more than +8% after the New York Times reported that the Biden administration is pushing to preserve the Covid vaccine program in debt talks.  Also, American International Group is up more than +3% after agreeing to sell its reinsurance business to Renaissance Holdings Ltd for roughly $3 billion.  In addition, Chevron closed up more than +2% after HSBC upgraded the stock to buy.

Overseas stock markets Tuesday settled lower.  The Euro Stoxx 50 closed down -0.99%.  China’s Shanghai Composite closed down -1.52%, and Japan’s Nikkei Stock Index closed down -0.42%. 

Today’s stock movers…

Consumer discretionary stocks retreated Tuesday.  Las Vegas Sands (LVS) close down more than -6% to lead losers in the S&P 500.  Also, Wynn Resorts (WYNN) closed down more than -6%, and Caesars Entertainment (CZR) and MGM Resorts International (MGM) closed down more than -5%.  In addition, Hilton Worldwide Holdings (HLT) closed down more than -4% 

Zoom Video Communications (ZM) closed down more than -8% to lead losers in the Nasdaq 100 after reporting 215,900 Q1 enterprise customers, below the consensus of 217,853, and reporting Q1 cash and cash equivalents of $1.03 billion, well below the consensus of $1.42 billion.

AutoZone (AZO) closed down more than -5% after reporting Q3 net sales of $4.09 billion, weaker than the consensus of $4.12 billion.

Brown & Brown (BRO) closed down more than -3% after it announced it entered into an agreement to buy Kentro Capital Limited.

Nucor (NUE) closed down more than -2% after JPMorgan Chase initiated coverage of the stock with a recommendation of underweight and a price target of $130. 

Moderna (MRNA) closed up more than +8% to lead gainers in the S&P 500 after the New York Times reported that the Biden administration is pushing to preserve the Covid vaccine program in debt talks.

PacWest (PACW) closed up more than +7%, adding to Monday’s +19% surge, to lead regional bank stocks higher after agreeing to sell a $2.6 billion portfolio of 74 real estate construction loans as part of its plan to shore up its liquidity.  Also, Zions Bancorp (ZION) closed up more than +4%.  In addition, Comerica (CMA) and Citizens Financial Group (CFG) closed up more than +2%.  Finally, KeyCorp (KEY), Synchrony Financial (SYF), and Fifth Third Bancorp (FITB) closed up more than +1%.

American International Group (AIG) closed up more than +4% after agreeing to sell its reinsurance business to Renaissance Holdings Ltd for roughly $3 billion. 

Chevron (CVX) closed up more than +2% to lead gainers in the Dow Jones Industrials after HSBC upgraded the stock to buy from hold with a price target of $189. 

Yelp (YELP) closed up more than +5% after activist investor TCS Capital Management said it believes “several buyers” would pay a premium for the company after it urged the board of directors to explore a sale.

Broadcom (AVGO) closed up more than +1% after Apple signed a multibillion-dollar deal with the company to develop 5G radio frequency components. 

Across the markets…

June 10-year T-notes (ZNM23) on Tuesday closed up +4.5 ticks, and the 10-year T-note yield fell by -1.5 bp to 3.700%.  June T-notes Tuesday recovered from a 2-1/4 month low, and the 10-year T-note yield fell back from a 2-1/4 month high of 3.757%. The slump in stocks Tuesday sparked short covering in T-notes as they rebounded from early losses and closed higher. T-notes raced to their highs Tuesday afternoon on strong demand for the Treasury’s $42 billion 2-year T-note auction that had a bid-to-cover ratio of 2.90, well above the 10-auction average of 2.62.

T-notes on Tuesday initially moved lower on hawkish comments from Minneapolis Fed President Kashkari, who said rates would have to be kept higher for longer if inflation persists. Also, rising inflation expectations were bearish for T-note prices after the 10-year breakeven inflation expectations rate Tuesday rose to a 3-week high of 2.289%.

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