Stocks Undercut by Chip Stock Weakness

The S&P 500 Index ($SPX) (SPY) Monday closed down -0.32%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.16%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.04%.

US stocks Monday settled mixed, with the Dow Jones Industrials posting a new record high and the Nasdaq 100 falling to a 1-week low.  Weakness in chip stocks on Monday weighed on the broader market.  Also, T-note yields Monday rebounded from an early decline and moved higher, which undercut stocks. 

Stocks were pressured Monday by concern about the escalation of conflict in the Middle East when more than 100 Israeli warplanes Sunday attacked sites in southern Lebanon.  Israeli intelligence said that Hezbollah was about to fire thousands of missiles and drones at northern Israel in retaliation for the killing of one of its commanders in July.

Stocks had some carryover support from last Friday when Fed Chair Powell said "the time has come for policy to adjust" to policy easing.  Also, energy stocks rose Monday after WTI crude oil rallied more than +3% to a 1-week high.

Dovish Fed comments Monday were supportive of stocks.  Richmond Fed President Barkin said he still sees upside risks for inflation, though he supports "dialing down" interest rates in the face of a cooling labor market.  Also, San Francisco Fed President Daly said, "The time to adjust policy is upon us," and it is appropriate for the Fed to begin cutting interest rates.

Monday’s US economic news was mixed for stocks.  July capital goods new orders nondefense ex-aircraft and parts, a proxy for capital spending, unexpectedly fell -0.1% m/m, slightly weaker than expectations of unchanged m/m.  However, the Aug Dallas Fed manufacturing outlook level of general business activity survey rose +7.8 to a 19-month high of -9.7, stronger than expectations of -16.0.

The markets are awaiting Wednesday’s earnings results from Nvidia and Friday’s US July core PCE deflator, the Fed’s preferred inflation gauge.

The markets are discounting the chances at 100% for a -25 bp rate cut for the September 17-18 FOMC meeting and at 28% for a -50 bp rate cut at that meeting.

Overseas stock markets Monday settled mixed.  The Euro Stoxx 50 closed down -0.25%.  China's Shanghai Composite closed up +0.04%.  Japan's Nikkei Stock 225 closed down -0.66%.

Interest Rates

September 10-year T-notes (ZNU24) Monday closed down -3.5 ticks.  The 10-year T-note yield rose +1.5 bp to 3.814%.  T-notes Monday gave up an early advance and posted modest losses.  Higher German bund yields Monday undercut T-note prices after the 10-year German bund yield rose to a 1-week high.  Also, an increase in inflation expectations was bearish for T-notes after Monday's US 10-year breakeven inflation rate rose to a 2-1/2 week high of 2.148%.  In addition, supply pressures weighed on T-notes as the Treasury will auction $183 billion T-notes this week, beginning with Tuesday’s $69 billion auction of 2-year T-notes.   

T-notes Monday initially moved higher after the US July core capital goods new orders, a proxy for capital spending, unexpectedly fell, a supportive factor for Fed policy.  Also, dovish Fed comments supported T-notes when Richmond Fed President Barkin said he supports "dialing down" interest rates and San Francisco Fed President Daly said, "The time to adjust policy is upon us." 

European government bond yields on Monday moved higher.  The 10-year German bund yield climbed to a 1-week high of 2.265% and finished up +2.3 bp at 2.248%.  The 10-year UK gilt did not trade Monday as UK markets were closed for a bank holiday.

The German Aug IFO business confidence index fell -0.4 to 86.6, stronger than expectations of 86.0.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for the September 12 meeting.

US Stock Movers

Chip stocks weighed on the broader market.  ARM Holdings Plc (ARM), Marvell Technology (MRO), and Broadcom (MRO) closed down more than -4%.  Also, Advanced Micro Devices (AMD), Micron Technology (MU), Applied Materials (MRO), and Lam Research (LRCX) closed down more than -3%.  In addition, Nvidia (NVDA), ASML Holding NV (ASML), KLA Corp (KLAC), and Qualcomm (QCOM) closed down more than -2%.  Finally, Intel (INTC) closed down -2% to lead losers in the Dow Jones Industrials. 

Energy stocks and energy service providers rallied Monday as the price of WTI crude rose more than +3% to a 1-week high.  As a result, Exxon Mobil (XOM) closed up more than +2%.  Also, Marathon Oil (MRO), APA Corp (APA), ConocoPhillips (COP), Schlumberger (SLB), Diamondback Energy (FANG), and Devon Energy (DVN) closed up more than +1%.

Tesla (TSLA) closed down more than -3% after Canada said it would impose a new 100% tariff on Chinese-made electric vehicles, which includes Teslas made in China. 

PDD Holdings (PDD) closed down more than -28% to lead losers in the Nasdaq 100 after reporting Q2 revenue of 97.06 billion yuan, well below the consensus of 99.99 billion yuan. 

Kymera Therapeutics (KYMR) closed up more than +3% after Wolfe Research upgraded the stock to outperform from peer perform with a price target of $65. 

Xcel Energy (XEL) closed up more than +2% after Argus Research upgraded the stock to buy from hold with a price target of $68.

Guardant Health (GH) closed down more than -8% after Nephron Research LLC downgraded the stock to sell from hold with a price target of $23. 

Arista Networks (ANET) closed down more than -3% on signs of insider selling after an SEC filing showed CEO Ullal sold $6.29 million of shares last Wednesday.

Uber Technologies (UBER) closed down more than -2% after being fined $324 million by the Dutch Data Protection Authority for failing to abide by European protection standards when it shipped sensitive data about its drivers to the US.

Premier Inc (PINC) closed down more than -2% after Benchmark Company LLC downgraded the stock to hold from buy.

Earnings Reports (8/27/2024)

Ambarella Inc (AMBA), American Woodmark Corp (AMWD), Box Inc (BOX), Citi Trends Inc (CTRN), Hain Celestial Group Inc/The (HAIN), nCino Inc (NCNO), Nordstrom Inc (JWN), Ooma Inc (OOMA), PVH Corp (PVH), REX American Resources Corp (REX), ScanSource Inc (SCSC), Semtech Corp (SMTC), SentinelOne Inc (S), Waldencast plc (WALD).

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