Stocks closed higher on Monday in a volatile trading session ahead of the Federal Reserve’s two-day policy meeting slated to kick off Tuesday. Rising yields now presents investors with an alternative, the gap between the S&P 500’s earnings yield and the returns from cash or high-grade, shorter-duration corporate bonds has narrowed significantly lately.
Of course – It’s rates week. The Fed will join the central banks of England, Norway, Sweden and Switzerland in raising rates this week
All eyes will be on the Fed this Wednesday with the consensus estimate is for a 75-basis-point increase. The Fed’s rate increases are having the most direct impact on US housing. Mortgage rates climbed above 6 percent last week for the first time since 2008. Rising borrowing costs have slowed home buying significantly, though the effect on home values has been more muted. Prices appear to still be rising in most parts of the country, though much slower than they once were.
Yields pushed higher overnight ahead of the Fed’s rate decision with the 10-year Treasury yield topping 3.51 per cent and hit its highest level in 11 years. Rising yields now presents investors with an alternative, the gap between the S&P 500’s earnings yield and the returns from cash or high-grade, shorter-duration corporate bonds has narrowed significantly lately. Given that equities are a lot choppier these days, it must be starting to get tempting to rotate back into bonds.
The US 1- to 5-year credit yields are now around 4.9 per cent against an S&P 500 earnings yield of ~5.9 per cent. But over the last 30 days, the S&P 500 has been 5.7 times more volatile. In short, investors now have a number of higher-yielding, lower-volatility alternatives if they want to step back from the market.
Of course the argument for bond rather than equities is further strengthened, when you consider the the impact of a possible global recession on earnings.
To the markets now overnight the Dow Jones jumped, 0.64 per cent, The S&P 500 gained 0.69 per cent and the Nasdaq Composite added 0.76 per cent
Stock wavered between gains and losses throughout the session, with the Dow Jones down as much as 263 points earlier in the day. At session lows, the S&P 500 and Nasdaq shed close to 1 per cent each.
Nine out of the 11 S&P 500 sectors ended the day positive, led to the upside by, consumer discretionary and industrials. Financials also rose as some investors bet that higher rates could benefit their bottom lines.The Materials sector was led by gains in aluminium, copper, steel & iron and agricultural stocks Health care & biotechs were the laggards, falling after comments from President Joe Biden indicated the pandemic is over. Vaccine stocks were hit hardest with Moderna off 9 per cent and Biontech down 8.5 per cent
Volkswagen announced last night that it planned to sell shares in the luxury sports-car brand Porsche at a valuation of up to $75 billion. The news marks one of the last steps in setting up one of the biggest IPOs in years, at a time when the market for taking companies public is particularly challenged.
In after market news Ford Motor warned investors that the company expects to incur $1 billion more in costs than previously expected during the third quarter due to increased costs and supply chain issues. Ford said supply problems have resulted in parts shortages affecting roughly 40,000 to 45,000 vehicles that haven’t been able to reach dealers. Shares of the company fell about 5 per cent in extended trading following the update.
One Australian dollar at 7:15 AM is slightly higher compared to the US dollar yesterday, buying 67.30 US cents (Mon: 67.24 US cents), 58.89 Pence Sterling, 96.39 Yen and 67.16 Euro cents.
Commodities – no major movements despite strong commodity stocks overnight
Iron ore futures are pointing to a 0.4 per cent fall.
Gold lost $5.30 or 0.3 per cent to US$1678 an ounce.
Silver was down $0.02 or 0.1 per cent to US$19.36 an ounce.
Copper lost $0.40 or 0.1 per cent to US$351.25 a pound.
Oil added $0.62 or 0.7 per cent to US$85.73 a barrel.
The SPI futures are pointing to a 0.8 per cent gain.
Briscoe Group (ASX:BGP ) is paying 10.699 cents unfranked
Euroz Hartleys Group (ASX:EZL ) is paying 20.27 cents fully franked
Hancock & Gore (ASX:HNG ) is paying 0.5 cents fully franked
Vulcan Steel (ASX:VSL ) is paying 32.6284 cents 87.62 per cent franked
Beacon Lighting Group (ASX:BLX)
Coronado Global Resources Inc (ASX:CRN)
Dalrymple Bay Infrastructure (ASX:DBI)
GR Engineering Services (ASX:GNG)
Shaver Shop Group (ASX:SSG)
Yancoal Australia (ASX:YAL)
Figures around the globe
Across the Atlantic, European markets closed mixed. Paris fell 0.3 per cent, Frankfurt added 0.5 per cent while London’s FTSE was closed.
In Asian markets, Tokyo’s Nikkei was closed, Hong Kong’s Hang Seng fell over 1 per cent and China’s Shanghai Composite closed 0.4 per cent lower.
Yesterday, the Australian sharemarket lost 0.3 per cent to close at 6720.
Sources: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics, CoinMarketCap.