U.S. Stocks Lower on Taiwan and Sharp T-note Yield Rise

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -0.67%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.23%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.30%. 

U.S. stock indexes on Tuesday were undercut by Taiwan tensions, a sharp +18 bp rise in the 10-year T-note yield, hawkish Fed comments, and a weaker-than-expected JOLTS job openings report.

House Speaker Pelosi, and her delegation that included several other Democratic House members, landed in Taiwan for her high-profile visit late Tuesday evening local time (late morning U.S. Eastern time).  Media reports say Ms. Pelosi on Wednesday plans to visit Taiwan’s parliament, meet with Taiwan’s president, and meet with democracy activists.  After Taiwan, Ms. Pelosi is scheduled to visit South Korea and Japan.  Upon landing, Ms. Pelosi said that her visit “in no way contradicts longstanding United State policy” and that America “continues to oppose unilateral efforts to change the status quo.”

Following up on its various blustery threats, China announced after Ms. Pelosi landed that China will conduct missile tests as soon as Tuesday night and will conduct military exercises in different areas surrounding the main island of Taiwan on Aug 4-7, after which time Ms. Pelosi will have left Taiwan.  Reuters reported that Chinese fighter jets Tuesday buzzed the median line that divides the Taiwan strait.  There were also reports of cyber attacks on Taiwan government websites.

The U.S. stock market stabilized after the news of China’s response to Ms. Pelosi’s visit to Taiwan and relief that there were no direct military incidents.

Tuesday’s July U.S. JOLTS job openings fell by -605,000 to 10.698 million, which was weaker than expectations for a decline to 11.0 million.  The JOLTS index is down from the record high of 11.855 million seen in March, but is still far above the pre-pandemic level of about 7 million, illustrating that there are still many jobs available despite concerns about a recession.

There were hawkish comments by Fed officials on Tuesday that dashed hopes raised by last week’s negative U.S. GDP news that the Fed might be close to halting its rate-hike regime.  San Francisco Fed President Mary Daly said that the Fed is “nowhere near almost done” on curbing the inflation rate. However, she had some soothing comments for the stock market by saying that she doesn’t see a labor market that is in a recession.

Meanwhile, Cleveland Fed President Loretta Mester said that the Fed is “very focused” on bringing down inflation “because that is the bedrock of making sure that we will have sustainable healthy labor markets over the medium and the longer run.”  Ms. Mester said she doesn’t see anything suggesting that inflation is leveling off.  She said she doesn’t believe the U.S. is in a recession.

Chicago Fed President Charles Evans said that he sees a 50 bp rate hike at the September FOMC meeting as reasonable but that 75 bp could be ok, and that he hopes that 25 bp hikes after September are reasonable.

Overseas stocks closed mostly lower Tuesday on Taiwan tensions.  The Euro Stoxx 50 closed down -0.59%, the Nikkei index closed down -1.42%, and China’s Shanghai Composite Index closed down -2.26%.

The Taiwan Stock Exchange Weighted Index (TSWE or TAIEX) on Tuesday closed down -1.56%, which was not a large enough decline to suggest that Taiwan’s investors are panicking about Ms. Pelosi’s visit and China’s response.

Today’s stock movers…

Bitcoin (^BTCUSD) on Tuesday fell by -0.36%, adding to Monday’s loss of -2.85% and falling farther from Saturday’s 1-1/2 month high. Despite the decline in bitcoin, Coinbase (COIN) on Tuesday rallied by +7.34%, and Marathon Digital (MARA) rallied by +5.74%.

Sep WTI crude oil futures prices (CLU22) on Tuesday recovered by +0.56% after Monday’s plunge of -4.80%, which took some pressure off oil stocks.  Exxon Mobil (XOM) still closed -0.33% lower, adding to Monday’s loss of -2.45%.

U.S.-listed Chinese stocks were vulnerable again Tuesday on U.S.-Chinese tensions.  Baidu (BIDU) closed down -0.63%, adding to Monday’s loss of -1.14%.  However, Alibaba (BABA) closed +2.52%, adding to Monday’s gain of +1.09%.

Caterpillar (CAT) fell sharply by -5.72% after reporting a Q2 revenue miss and lower sales in China.

Transocean (RIG) rallied +16% on positive earnings news.

Cowen Group (COWN) rallied more than +8% after the announcement that Toronto-Dominion Bank will buy the investment bank in a deal worth more than $1 billion.

Uber (UBER) rallied +19% on a positive earnings report.

Across the markets…

Sep 10-year T-notes (ZNU22) on Tuesday fell sharply by -1-075/32 points, and the 10-year T-note yield rose by +17.7 bp to 2.750%.  T-note prices fell on hawkish Fed comments that seemed designed to put to rest any market ideas that the Fed might be close to ending its rate-hike regime.

T-note prices saw underlying support from a -3 bp decline in the 10-year breakeven inflation expectations rate to 2.48%, a weaker-than-expected JOLTS report, and safe-haven demand tied to Taiwan tensions.

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