Investors continue to react to the Federal Reserve's indications on rate increases last week.
AFP via Getty ImagesU.S. stocks took off after one of the worst trading days in months on Friday: The Dow industrials took their worst tumble since October, and the S&P 500 slipped the most since February.
By noon Monday, the Dow Jones Industrial Average was up 499 points, or 1.5%, while the S&P 500 was up 1.2%. The Nasdaq Composite was up 0.7%.
Last week’s market decline came after the U.S. Federal Reserve indicated that it would begin raising interest rates sooner than expected, with two increases penciled in for 2023. St. Louis Federal Reserve President James Bullard said on Friday that he sees an initial rate increase happening in 2022.
Part of the market’s rebound on Monday was a revived reflation trade, at least to some degree. Value stocks, which are more sensitive to inflation and economic growth, are outperforming the market. The Russell 2000 was 1.9% higher.
The price of WTI crude oil also rose 1.5% to just above $72 a barrel, sending the Energy Select Sector SPDR ETF (XLE) up more than 3%. Energy stocks tend to do well during periods of economic growth.
Banks stocks were also having a strong day, powered by rising long-dated bond yields and falling short-dated yields. The SPDR S&P Bank ETF (KBE) gained 3.4%, as the 10-year Treasury yield rose to 1.48% from 1.44% at Friday’s close, while the 2-year yield was down a tick. Banks borrow short-term money to lend for the long-term, so the dynamic seen in the bond market Monday increases profitability for banks.
Friday saw cyclical stocks fall the hardest as the selloff centered on concerns that the Fed’s moves may quell future growth and inflation. But, as Stephanie Lang, chief investment officer at Homrich Berg put it, investors are still in the cyclical camp on Monday. “They’re taking advantage of the sell-off in some of these names.”
Those dynamics are consistent with technology stocks underperforming on Monday. The Nasdaq 100, which tracks 102 of the largest tech stocks, was up only 0.6%. Rising long-dated bond yields signify that investors acknowledge current inflation and economic growth, which provides a bigger boost to earnings for more mature cyclical companies than it does for technology firms.
Asian stocks were in the spotlight earlier Monday as Japan’s key index took a tumble.
In Asia, Tokyo’s Nikkei 225 fell 3.3%, while Hong Kong’s Hang Seng declined 1.1%. The Shanghai Composite rose 0.1%.
“Asian markets slumped heavily as investors continued to react to last week’s U.S. Federal Reserve meeting which has curdled sentiment by raising the prospect of earlier than expected rate rises,” said Russ Mould, an analyst at AJ Bell.
Last week’s news from the Fed has also taken the wind out of the reflation trade, analysts noted, adding to problems for commodities, after China announced plans last week to tap national metals reserves to rein in a rally in the sector. Futures for both iron ore and copper were down near 1%.
Marshall Gittler, an analyst at BDSwiss, noted that “expectations of higher interest rates and lower inflation—plus China’s moves to rein in speculation—have sent commodity prices sharply lower.”
The FTSE 100 in London lifted 0.3% as the pan-European Stoxx 600 was 0.3% higher. The CAC 40 in Paris climbed 0.2% and Frankfurt’s DAX rose 0.5%.
Shares in London-listed mining giants Rio Tinto, Glencore, Antofagasta, and BHP, which are all major producers of iron or copper, were lower. Rio Tinto stock was further weighed on by a downgrade from Swiss bank UBS, which changed its rating on the stock to Sell from Neutral, noting risks from a more hawkish Fed and China taking actions to deflate commodity prices.
Shares in Morrisons—one of the U.K.’s largest supermarket groups and e-commerce giant Amazon’s grocery delivery partner in the country—jumped near 32%. Analysts expect the company to attract more takeover bids, after rejecting a £8.7 billion ($12 billion) offer from U.S. private-equity firm Clayton, Dubilier & Rice over the weekend.
Shares in Vivendi, the French media giant, fell 0.24% in France trading, after blank-check group Pershing Square Tontine Holdings—founded by billionaire American investor Bill Ackman —agreed to buy 10% of Universal Music Group on Sunday. The deal, for around $4 billion, gives Universal Music an enterprise value of €35 billion ($41.6 billion). Pershing Square stock rose around 2% in the U.S. premarket.
Lloyds Banking stock rose 1.2% in London trading after a report over the weekend that the group was set to buy its first property under a new plan to diversify by becoming a private landlord. The move would make it the first major U.K. retail bank to move into private rentals, the Mail on Sunday reported.
In U.S. trading, Marathon Oil (MRO) stock gained 4.8% after getting upgraded to Neutral from Underperform at Bank of America.
MarineMax (HZO) stock gained 6.6% after getting upgraded to Buy from Neutral at B. Riley Securities.
ZipRecruiter (ZIP) stock gained 9.3% after five analysts initiated coverage with Neutral, Buy, Strong Buy and two Outperform ratings.
Taiwan Semiconductor Manufacturing Company (TSM) stock dropped 1.6% after getting downgraded to Equal Weight from Overweight at Morgan Stanley.
Arcturus Therapeutics (ARCT) stock dropped 8.4% after getting downgraded to Underweight from Equal Weight at Barclays.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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