Stocks Higher on Strength in Chip Stocks and China’s Rate Cut

The S&P 500 Index ($SPX) (SPY) on Monday rose by +1.08%, the Dow Jones Industrials Index ($DOWI) (DIA) rose by +0.32%, and the Nasdaq 100 Index ($IUXX) (QQQ) rose by +1.54%.

US stocks rallied Monday as companies recovered from last Friday’s major IT outage and as China unexpectedly cut rates by -10 bp.  Also, chip stocks led the stock market higher. However, US political uncertainty rose after President Biden on Sunday dropped out of the presidential race and endorsed Vice President Harris. Stocks were also undercut by a +1.6 bp rise in the 10-year T-note yield.

Global stocks received a boost after China on Monday unexpectedly cut its short-term policy rates by -10 bp, leading to a cut by large Chinese banks of their benchmark lending rates.  The Peoples Bank of China (PBOC) on Monday cut its 7-day reverse repo rate, a key short-term policy rate, by -10 bp to 1.7%. The PBOC’s rate cut was seen as a consolation stimulus measure after China’s twice-a-decade Third Plenum last week confirmed that the Chinese government does not plan to implement a massive fiscal stimulus program to boost the weak economy.  China’s 10-year government bond yield Monday fell by -2 bp after the PBOC’s rate cut was announced.

The so-called Trump trade saw some uncertainty Monday after his opponent switched to Vice President Harris from President Biden.  The Trump trade favors sectors benefiting from tax cuts, looser fiscal policy, higher trade tariffs, and weaker regulations.  The markets will be watching to see how quickly VP Harris can wrap up the nomination as the Democratic presidential candidate and how she polls against Mr. Trump once she becomes the nominee.

The markets are focused on tech stocks with the arrival of tech earnings.  Tesla and Alphabet are reporting on Tuesday.

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on July 30-31 and 97% for the following meeting on September 17-18.

Overseas stock markets Monday are mixed.  The Euro Stoxx 50 recovered from last Friday’s 5-week low and closed up +1.45%.  China's Shanghai Composite closed down -0.61%.  Japan's Nikkei Stock 225 Index closed down -1.16%.

Interest Rates

September 10-year T-notes (ZNU24) on Monday closed down -3 ticks.  The 10-year T-note yield rose by +1.6 bp to 4.255%.  T-note prices were undercut by reduced safe-haven demand with the +1% rally in the S&P 500 index.  T-note prices were also undercut by supply pressure as the Treasury this week will auction $213 billion of T-notes and floating-rate notes. The Treasury will auction $69 billion of 2-year T-notes on Tuesday, $30 billion of 2-year floating rate notes and $70 billion of 5-year T-notes on Wednesday, and $44 billion of 7-year T-notes on Thursday.

Bullish factors for T-note prices on Monday included China’s unexpected -10 bp rate cut, and the -0.5 bp decline in the 10-year breakeven inflation expectations rate to 2.291%.

European government bond yields rose on Monday.  The 10-year German bund yield rose +2.8 bp to 2.495%. The 10-year UK gilt yield rose by +3.7 bp to 4.161%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 77% for the September 12 meeting.

US Stock Movers

ON Semiconductor (ON) on Monday rallied by +6.75% on news of a multi-year deal for the company to become the primary supplier of a fully optimized power system solution for Volkswagen’s next-generation electric vehicles.

ON Semiconductor’s positive news boosted chip stocks overall, which dominated the leader board for the Nasdaq 100 Index.  Lam Research (LRCX), KLA Corp (KLAC), and Applied Materials (AMAT) rallied by more than +6%.   ASML Holding NV (ASML) and Microchip Technology (MCHP) rose by more than +5%.  Nvidia (NVDA) closed up +4.89%. 

Other leaders in the Nasdaq 100 index included Tesla (TSLA), with a +5.15% gain, and PayPal (PYPL), with a +2.43% gain.

CrowdStrike  (CRWD) on Monday fell by another -13.35%, adding to last Friday’s -10.85% plunge due to the global IT outage that its software update caused last Friday for some Windows computers.  Guggenheim Securities Monday cut its rating on the stock to neutral from buy.  CrowdStrike competitors closed higher again Monday, with SentinelOne (S) up +6.85% and Palo Alto Networks (PANW) up +0.97%. 

Verizon (VZ) fell -5.96% on a revenue miss in its earnings report as fewer people upgraded wireless equipment.

Bank of America (BAC) fell -1.28% after a filing last Friday that showed that Warren Buffett’s

Berkshire Hathaway sold about 34 million shares in the bank.

McDonald’s (MCD) rose +1.00% on support from news that most McDonald’s restaurants will extend their $5 meal deal in a bid to attract budget-conscious diners, which may increase foot-traffic to the restaurants.

10X Genomics (TXG) rallied +8.58% after Jefferies raised its rating on the company to buy from hold on an attractive stock valuation and expectations for positive developments for the company.

Earnings Reports (7/23/2024)

United Parcel Service Inc (UPS), General Motors Co (GM), Kimberly-Clark Corp (KMB), Avery Dennison Corp (AVY), PulteGroup Inc (PHM), Quest Diagnostics Inc (DGX), HCA Healthcare Inc (HCA), Danaher Corp (DHR), Sherwin-Williams Co/The (SHW), Lockheed Martin Corp (LMT), Invesco Ltd (IVZ), A O Smith Corp (AOS), Genuine Parts Co (GPC), Freeport-McMoRan Inc (FCX), Pentair PLC (PNR), Coca-Cola Co/The (KO), Comcast Corp (CMCSA), Moody's Corp (MCO), MSCI Inc (MSCI), NVR Inc (NVR), Philip Morris International In (PM), General Electric Co (GE), PACCAR Inc (PCAR), Capital One Financial Corp (COF), Packaging Corp of America (PKG), CoStar Group Inc (CSGP), EQT Corp (EQT), Visa Inc (V), Texas Instruments Inc (TXN), Enphase Energy Inc (ENPH), Seagate Technology Holdings PL (STX), Alphabet Inc (GOOGL), Chubb Ltd (CB), Tesla Inc (TSLA).

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