Stocks Fall Sharply on China Trade Tensions

The S&P 500 Index ($SPX) (SPY) on Friday closed down -2.71%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.90%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -3.49%.  December E-mini S&P futures (ESZ25) fell -2.61%, and December E-mini Nasdaq futures (NQZ25) fell -3.39%.

Stock indexes gave up an early advance on Friday and sold off sharply, with the S&P 500 and Nasdaq 100 sliding to 2-week lows and the Dow Jones Industrials dropping to a 1-month low.  Stocks plummeted as US trade tensions escalated with China after President Trump threatened a "massive increase" of tariffs on Chinese goods, citing China's recent "hostile" export controls on rare-earth minerals. Mr. Trump also said there seems to be no reason to meet Chinese President Xi Jinping at the APEC meeting in South Korea later this month.

Stocks initially moved higher on Friday, with the Nasdaq 100 posting a new all-time high.  Lower bond yields initially supported stocks on Friday due to dovish comments from Fed Governor Christopher Waller and St. Louis Fed President Alberto Musalem when they said they supported additional Fed rate cuts.  However, the declines in T-note yields accelerated as stocks slumped in response to President Trump's tariff threats, with the 10-year T-note yield falling to a three-week low of 4.04%. 

The University of Michigan US Oct consumer sentiment index fell -0.1 to a 5-month low of 55.0, stronger than expectations of 54.0.

The University of Michigan US Oct 1-year inflation expectations unexpectedly fell -0.1 to 4.6%, versus expectations of no change at 4.7%. The Oct 5-10 year inflation expectations remained unchanged at 3.7%, right on expectations.

Fed Governor Christopher Waller said, "The labor market is weak," and he's open to quarter-point interest rate cuts at the coming FOMC meetings.

St. Louis Fed President Alberto Musalem said that, "Looking ahead, I am open-minded about a potential further reduction in interest rates to provide further insurance against labor market weakening." 

Most stock indexes rallied to record highs this week on optimism that growth in the AI sector and spending on artificial intelligence will translate into corporate profits.  Stocks are also underpinned by hopes that a resilient US economy and additional Fed easing will continue to support the economy.

The shutdown of the US government is now into its second week, weighing on market sentiment and delaying key economic reports.  The government shutdown means delays in the release of government reports, including the last two weeks of weekly initial unemployment claims, Tuesday's Aug US trade report, and last Friday's monthly payroll report.  The Bureau of Labor Statistics (BLS) on Friday said that it will release the September consumer price report on October 24 if the government shutdown continues into next week.  The Sep CPI report is scheduled for release on October 15. The White House has warned that if the government shutdown lingered, it would trigger widespread dismissals of employees in government programs that don't align with President Trump's priorities.  Bloomberg Economics estimates that 640,000 federal workers will be furloughed during the shutdown, which would expand jobless claims and push the unemployment rate up to 4.7%.

Rising corporate earnings expectations are a bullish backdrop for stocks.  According to Bloomberg Intelligence, more than 22% of companies in the S&P 500 provided guidance for their Q3 earnings results that are expected to beat analysts' expectations, the highest in a year.  However, Q3 profits are expected to have risen by +7.2%, the smallest increase in two years.  Also, Q3 sales growth is projected to slow to +5.9% from 6.4% in Q2. 

The markets are pricing in a 97% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29. 

Overseas stock markets on Friday settled lower.  The Euro Stoxx 50 closed down -1.68%.  China's Shanghai Composite closed down -0.94%.  Japan's Nikkei Stock 225 closed down -1.01%.

Interest Rates

December 10-year T-notes (ZNZ5) on Friday closed up by +21 ticks.  The 10-year T-note yield fell -8.3 bp to 4.055%.  Dec T-notes rallied to a 3-week high Friday, and the 10-yer T-note yield fell to a 3-week low of 4.042%.  T-notes rallied on dovish comments today from Fed Governor Christopher Waller and St. Louis Fed President Alberto Musalem, who said they supported additional Fed rate cuts.  Sliding inflation expectations are also bullish for T-notes, following the 10-year breakeven inflation rate's decline to a 2.25-month low of 2.316% on Friday.  Gains in T-notes accelerated Friday after stocks sold off on threats from President Trump of "massive increases" in tariffs on Chinese goods. 

T-notes also have support amid concerns about the ongoing US government shutdown, which could lead to additional job losses, reduced consumer spending, and a weakened US economy, potentially allowing the Fed to continue cutting interest rates.  

European government bond yields on Friday moved lower.  The 10-year German bund yield fell to a 3-week low of 2.633% and finished down -5.9 bp at 2.644%.  The 10-year UK gilt yield fell to a 2-week low of 4.664% and finished down -7.1 bp to 4.675%.

ECB Governing Council member and Bundesbank President Nagel said "the bar is rather high" to alter his assessment that the current ECB monetary policy stance is appropriate.

ECB Governing Council member Kazaks said we are about neutral on ECB rates as inflation remains contained and the current 2% rate is appropriate.

Swaps are discounting a 2% chance for a -25 bp rate cut by the ECB at its next policy meeting on October 30.

US Stock Movers

Chipmakers fell sharply on Friday, dragging the overall market lower. ARM Holdings Plc (ARM) closed down more than -9%, and Microchip Technology (MCHP) and ON Semiconductor (ON) closed down more than -8%.  Also, Advanced Micro Devices (AMD), NXP Semiconductors NV (NXPI), and Qualcomm (QCOM) closed down more than -7% and Lam Research (LRCX), KLA Corp (KLAC), and GlobalFoundries (GFS) closed down more than -6%.  In addition, Analog Devices (ADI), Broadcom (AVGO), Micron Technology (MU), and Marvell Technology (MRVL) closed down more than -5%.  Finally, ASML Holding NV (ASML) closed down more than -4%.

The Magnificent Seven technology stocks sank on Friday, further weighing on the broader market.  Tesla (TSLA) closed down more than -5% and Amazon.com (AMZN) closed down more than -4% to lead losers in the Dow Jones Industrials.  Also, Nvidia (NVDA) closed down more than -4%, and Apple (AAPL) and Meta Platforms (META) closed down more than -3%.  In addition, Microsoft (MSFT) closed down by more than -2% and Alphabet (GOOGL) closed down by more than -1%.

Energy producers and energy service providers retreated on Friday after the price of WTI crude oil fell by more than 4% to a five-month low.  As a result, APA Corp (APA) closed down by more than -7% and Halliburton (HAL) closed down more than -6%.  Also, Baker Hughes (BKR), Devon Energy (DVN), and Occidental Petroleum (OXY) closed down more than -5%, and ConocoPhillips (COP) closed down more than -4%.  In addition, Marathon Petroleum (MPC), Phillips 66 (PSX), and Diamondback Energy (FANG) closed down more than -3%. 

Venture Global (VG) closed down more than -24% as it potentially faces multibillion-dollar damages over disputed liquefied natural gas shipments, after an unexpected loss in a BP Plc arbitration that could pave the way for additional claims. 

Levi Strauss (LEVI) closed down more than -12% after forecasting full-year adjusted EPS of $1.27-$1.32, the midpoint below the consensus of $1.31.

Mosaic (MOS) is down more than -9% after reporting Q3 preliminary phosphate sales volumes of 1.70 million tons, weaker than the consensus of 1.83 million tons. 

Doximity (DOCS) closed down more than -9% after JPMorgan Chase downgraded the stock to underweight from neutral with a price target of $62. 

Align Technology (ALGN) closed down more than -4% after Jeffries downgraded the stock to hold from buy.

Applied Digital (APLD) closed up more than +15% after saying it is in advanced discussions with a hyperscaler client for its second data center in North Dakota. 

Elastic NV (ESTC) closed up more than +5% after announcing a $500 million stock buyback program and raising its full-year 2026 sales outlook to $1.697 billion-$1.703 billion from a previous estimate of $1.697 billion-$1.689 billion. 

PepsiCo (PEP) closed up more than +3% to lead gainers in the S&P 500 and Nasdaq 100, adding to Thursday's +4% advance, after reporting Q3 net revenue of $23.94 billion, better than the consensus of $23.85 billion. 

CVS Health (CVS) closed up more than +1% after the US government released final star ratings for 2026 for Medicare Advantage plans, and Evercore ISI said the company's final numbers are likely "a relief" for investors.

Amcor Plc (AMCR) closed up more than +1% after forecasting full-year adjusted EPS of 80 cents to 83 cents, above the consensus of 80 cents.

Earnings Reports(10/13/2025)

Fastenal Co (FAST), Lionsgate Studios Corp (LION).