Stocks traded flat today amid another volatile session. The Dow, S&P, and Nasdaq Composite all gained initially before retracing while Treasury yields jumped. The 10-year Treasury yield hit 4.18% shortly after noon.
Rising rates have limited stocks over the last two sessions, undoing any bullish momentum generated by stronger-than-expected quarterly earnings. Robust earnings from Netflix (NASDAQ: NFLX) and United Airlines (NASDAQ: UAL), for example, were unable to overcome rising yields yesterday as the market ultimately closed significantly lower.
“Earnings season is in full swing so as investors parse through with an extra eye on guidance expect volatility to remain elevated,” said Morgan Stanley’s Mike Loewengart in an email.
But many analysts remain convinced that a good earnings season could power stocks back to their recent highs.
“Our guess is that earnings will be good enough to keep the market in a trading range, but not enough to send it back up to its midsummer high and given the lagged nature of monetary policy, we would argue that time is not on the market’s side. We would note that US rates continue to push out to new cycle highs, helping the USD trounce its peers,” said Michael Shaoul of Marketfield Asset Management in a note.
Rising rates and a strong dollar have only made the market’s recent selloff worse. And, unless surging yields slow their ascent soon, stocks could get smacked lower again even if earnings continue to impress.
There’s also the ongoing turmoil in Britain to consider. UK Prime Minister Liz Truss said this morning that she was resigning as PM only after a mere two months, making her reign the shortest on record for the position.
Truss’s appointment of Kwasi Kwarteng as finance minister led to an unprecedented pound crash as a result of Kwarteng’s mini-budget release, which included tax cuts and massive government spending plans – two things the UK didn’t need during a time of galloping inflation.
Truss recently fired Kwarteng but weeks of continued mismanagement divided her Conservative Party into “pro-Truss” and “anti-Truss” camps. By resigning, Truss should restore some unity in British Parliament.
The next PM up, however, could just as easily spark additional chaos within the British financial system. UK 10-year government bonds (gilts) initially rallied today on the news, approached resistance at the early October high, and then retraced.
A series of lower highs and lows has now been set, indicating that another bearish move could be on its way for gilts thus driving British yields higher still.
The pound similarly rallied today relative to the dollar before falling. British markets are clearly bracing for more uncertainty.
Will that result in a “near-Lehman moment” like we had in late September? Probably not. The new finance minister is unlikely to commit the same mistakes as Kwarteng.
However, if the Bank of England carries rates higher following its next meeting, the gilt selling could easily intensify, driving yields higher regardless of what the next PM decides to do.
That same kind of thing could happen stateside, too, with the November FOMC approaching quickly.
Make no mistake about it:
Untamed yields will drive stocks lower even if earnings look good. And, until the bond carnage ends, traders should be very careful about dip-buying.
