Tech Stocks Rise in Late Trading as Tesla Gains 9%: Markets Wrap

“While that may be broadly fair, markets are always about the speed of movement, not the overall level, and the fact that stocks have not flinched in the face of these moves suggests complacency,” Krinsky said. “Whether or not this is the start of pre-election jitters, we continue to see overall downside risk for equities in the coming weeks, with an SPX decline into the 5,500-5,650 zone a good possibility.”

The price of options that protect against a prolonged collapse in Treasury bonds has risen to its highest level this year amid fears that losses could worsen.

Meanwhile, swap prices reflect less than 100 percent certainty that the central bank will cut interest rates at each of its two remaining policy meetings this year. The bond market is also reducing bets on the extent of the Fed's rate cuts next year.

“The price of options to protect against Treasury losses is rising rapidly,” said Andrew Brenner of NatAlliance Securities. “In the USA it is about the election and the possible election victory. This is what is built into the tariff structure and gives the vigilantes the green light. It will turn around, but it may require poor employment numbers or an election surprise.”

“We want to caution investors against reading too much into the recent rise in bond yields,” said Tiffany Wilding of Pacific Investment Management Co. “In the last six major Fed rate-cutting cycles, the 10-year Treasury yield has changed every month.” After “The first cut did not provide a consistent signal about the extent of further cuts or whether the U.S. economy was heading into recession.”

In fact, in most cases, returns rose in the month after the first cut, she found.

“The performance of the stock market in the first month after the Fed began cutting interest rates was a similarly poor indicator of future economic performance (and market returns),” Wilding said. “In most cases, stocks tended to rise in the month following the start of a cutting cycle, although the divergence increased over time.”

Looking at the same completely different cycles of 1995 and 2007, stock returns (as determined by the interest rate-sensitive small cap Russell 2000) in the month following the first cut were positive in both cycles (at 4.6% and 6.9%, respectively). Wilding said. However, stock market performance fell by 4.4% in the year after the 2007 cut, while it rose by 21% in the year after the 1995 adjustment.

“Despite the recent performance of 10-year Treasury yields, we remain bullish on U.S. large caps,” said Nicholas Colas of DataTrek Research. “The story goes that the idea that interest rates will explode because of deficit concerns should be discounted, at least in the short term. Instead, we see higher yields as a sign that economic growth remains robust and corporate earnings growth should continue in the coming quarters.”

“All else being equal, the more interest rate cuts are lifted for next year, the less of an outlier it becomes for the market to achieve 15% earnings growth,” said Ryan Grabinski of Strategas. “However, further rate cuts do not change the challenges S&P faces in achieving this growth rate.”

Revenue growth continues to show signs of slowing, and if analysts suspected interest rate cuts would lower interest expenses, that argument will begin to fade into the background, Grabinski said.

“Near 14% EPS margins continue to appear increasingly difficult to achieve,” he added. “The question is when something will give.”

For Jose Torres of Interactive Brokers, the stock market is extremely fragile given the headwinds ahead.

“Earnings expectations for next year are high, increasing the significance of the forecast compared to previous results,” he said. “Considering that valuations are around 22 times next year’s earnings, any disappointment in the bottom line outlook could have a significant impact on stock market performance.”

Company highlights:

• Boeing Co. is likely to continue burning cash next year as it struggles to restart production following a lengthy labor strike and regulatory scrutiny of its factory processes.

• AT&T Inc. added more wireless customers in the third quarter than analysts expected, continuing its winning streak from the previous period.

• Hilton Worldwide Holdings Inc. cut its profit outlook as adding new hotels to its global system failed to offset weaker travel demand.

• Coca-Cola Co. fell as investors weighed how long the soft drink maker could keep raising prices without enticing customers to buy more of its drinks.

• Spirit Airlines Inc. is in discussions with Frontier Group Holdings Inc. about filing for bankruptcy protection to allow a takeover by the rival discount carrier, according to people familiar with the matter.

• Capital One Financial Corp.'s proposed $35 billion acquisition of Discover Financial Services. is being investigated by New York Attorney General Letitia James, who said the deal would have a “significant impact” on consumers in the state.

• Deutsche Bank AG said it would have to set aside more money than expected to pay down debt and had to adjust its forecast for the second time this year.

• Kering SA warned that its annual profit would fall to its lowest level since 2016 as a slump in Chinese demand for luxury goods complicates a turnaround at Gucci, the French fashion group's biggest label.

Important events this week:

• US new home sales, jobless claims, S&P Global Manufacturing and Services PMI, Thursday

• UPS, Barclays results, Thursday

• The Fed's Beth Hammack speaks on Thursday

• U.S. Consumer Durables, University of Michigan Consumer Sentiment, Friday

Some of the key moves in the markets:

Shares

• The S&P 500 fell 0.9% as of 4 p.m. New York time

• The Nasdaq 100 fell 1.6%

• The Dow Jones Industrial Average fell 1%

• The MSCI World Index fell 0.9%

• Bloomberg Magnificent 7 Total Return Index fell 2.1%

• The Russell 2000 Index fell 0.8%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro fell 0.1% to $1.0786

• The British pound fell 0.4% to $1.2933

• The Japanese yen fell 1% to 152.58 per dollar

Cryptocurrencies

• Bitcoin fell 1.6% to $66,416.63

• Ether fell 4.7% to $2,509.01

Bonds

• The 10-year Treasury yield rose three basis points to 4.23%

• The yield on 10-year German government bonds fell by one basis point to 2.30%

• The 10-year UK government bond yield rose three basis points to 4.20%

raw materials

• West Texas Intermediate crude fell 1.1% to $70.98 a barrel

• Spot gold fell 1.2% to $2,716.54 an ounce

This story was produced with support from Bloomberg Automation.

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