Stocks Are Unable to Sustain Early Rally

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday closed -0.12%, the Dow Jones Industrials Index ($DOWI) (DIA) closed +0.09%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed -0.37%. 

Stocks on Monday were unable to sustain an early 1% rally and closed the day mostly lower.  Bearish factors included continued worries about a hawkish Fed policy, disappointing earnings news from Nvidia, and continued Taiwan tensions.

Supportive factors on Monday included a -8 bp decline in the 10-year T-note yield, strength in renewable energy and electric vehicle stocks after the Senate’s passage of the Inflation Reduction Act on Sunday, and indications of a stronger risk-on environment with Monday’s rally in bitcoin and meme stocks. 

Taiwan tensions continued after China’s military Monday announced new military exercises around Taiwan focused on antisubmarine and air-to-sea strikes.  The previous 4-day set of exercises ended Sunday.  China is keeping up the pressure on Taiwan after House Speaker Pelosi’s visit to Taiwan last week.  However, Reuters reports that China Monday did not announce specific locations for its new exercises, and there were no new “notices to airmen” (NOTAM) from China.  Reuters reports that civilian air traffic around Taiwan is slowly returning to normal despite the new Chinese drills.  Bloomberg reports that shipping around Taiwan is also returning to normal.

The Senate on Sunday passed the Inflation Reduction Act, which is focused on $430 billion of climate and health care spending, and also contains a reduction in the federal budget deficit.  The House is expected to pass the bill as soon as this Friday and send it to President Biden for his signature.

The markets are watching the situation in Ukraine as warnings grow about a potential nuclear disaster after Russia launched shells near Ukraine’s Zaporizhzhia nuclear power plant.  The power plant is occupied by Russian troops and run by Ukrainian technicians, but the Russian military reportedly shelled the area in recent days.

The markets are looking ahead to Wednesday’s U.S. CPI report for indications of whether inflation is peaking.  A stronger-than-expected CPI report on Wednesday could solidify expectations for another large Fed rate hike at its next meeting in September, which were sparked by last Friday’s much stronger-than-expected U.S. July payroll report of +528,000 (vs expectations of +250,000).   The consensus is for Wednesday’s July CPI report to show an increase of +0.2% m/m and +8.7% y/y, down from June’s report of +1.3% m/m and +9.1% y /y.  The July core CPI is expected at +0.5% m/m and +6.1%, compared with June’s report of +0.7% m/m and +5.9% y/y.

The Euro Stoxx 50 on Monday closed +0.85%, China’s Shanghai Composite index closed up +0.31%, and Japan’s Nikkei index closed up +0.26%.

Today’s stock movers…

Renewable energy stocks saw support Monday after the Senate on Sunday passed the Inflation Reduction Act with $369 billion of new climate spending.   Tesla (TSLA) Monday rallied more than +5% early but then fell back and closed the day only +0.19% higher.  EV companies Rivian Automotive (RIVN) closed +6.16%, and Lucid Group (LCID) closed +3.10%.  Hydrogen and fuel cell company Plug Power (PLUG)  closed up +1.11%.

Solar companies traded mostly higher on the favorable provisions in the Inflation Reduction Act bill, which center on a decade-long extension of investment tax credits, production tax credits, and residential solar tax credits.  First Solar (FSLR) closed +4.13%, Sunrun (RUN) closed +2.10%, and Array Technologies (ARRY) closed +5.15%. 

Crypto stocks saw support with Bitcoin (^BTCUSD) up +3.05%, reaching a 2-month high and rising above $24,000.  Coinbase (COIN) on Monday closed +4.72%, Marathon Digital (MARA) closed +1.24%, and Riot Blockchain (RIOT) closed +4.70%.

Nvidia (NVDA) fell -6.85% after a disappointing revenue forecast due to the gaming slump. 

Bed, Bath & Beyond (BBBY) on Monday rallied +39.01% on a continued meme-trading frenzy.  Monday’s rally added to the +78% gain seen in the eight sessions through last Friday as it caught on as a meme stock.  In other meme trading stocks, AMC Entertainment (AMC) Monday rallied +7.39%.

Palantir (PLTR) fell -14.74% after its revenue guidance missed the consensus.

BioNTech (BNTX) fell -7.54% after an earnings miss.

Across the markets…

Sep 10-year T-notes (ZNU22) on Monday closed +15.5 ticks, and the 10-year T-note yield fell -7.8 bp to 2.750.  T-note prices on Monday saw some short-covering after last Friday’s -1-11.5/32 point plunge on the stronger than expected payroll report.  The report led to a sharp +17 bp jump in the Dec 2022 federal funds futures contract last Friday to an effective yield of 3.485%, implying an overall Fed rate hike of another +116 bp by year-end from the current effective federal funds rate of 2.33%.  The next FOMC meeting is on Sep 20-21.

T-note prices Monday also saw support from a small -0.3 bp decline in the 10-year breakeven inflation expectations yield to 2.472%.

T-note prices this week will be navigating supply pressures as the Treasury auctions $42 billion of 3-year T-notes on Tuesday, $35 billion of 10-year T-notes on Wednesday, and $21 billion of 30-year T-bonds on Thursday.

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