Closing Stock Market SummaryThe stock market started the week with a nice rally after a big sell off on Friday. The major averages logged sizable gains thanks to broad buying efforts.
The positive disposition today was thanks in part to UK Finance Minister Hunt scrapping most of the tax measures from the prior "mini-budget," which led to a rally in the gilt market and British pound. The 10-yr gilt yield fell 42 basis points to 3.97% and the pound surged (GBP/USD +1.5% to 1.1351).
Other tailwinds for stocks today included better-than-expected Q3 earnings from Bank of America (BAC 33.62, +1.92, +6.1%) and Morgan Stanley Chief Strategist Mike Wilson, who has been right this year with his bear market call, saying the S&P 500 could potentially get to 4,150 in a technical rally in the short term if an earnings capitulation or recession can be avoided.
Many stocks moved higher today with the advance-decline line favoring advancing issues by a greater than 4-to-1 margin at the NYSE and a greater than 2-to-1 margin at the Nasdaq.
Gains in mega cap stocks boosted index level performance. The Vanguard Mega Cap Growth ETF (MGK) closed up 3.5% versus a 2.2% gain in the Invesco S&P 500 Equal Weight ETF (RSP) and a 2.7% gain in the S&P 500. Apple (AAPL 142.41, +4.03, +2.9%) was a key mover after Morgan Stanley named it a top pick in the event of an economic downswing.
All 11 S&P 500 sectors closed in the green with consumer discretionary (+4.2%) showing the biggest gain. That move was bolstered by constructive comments on the state of the consumer from Bank of America following its earnings report. Consumer staples (+1.1%) and energy (+1.2%) brought up the rear.
WTI crude oil futures fell 0.3% today to $85.49/bbl. Natural gas futures fell 7.7% to $5.99/mmbtu.
Buyers in the equity market were not deterred when the 10-yr Treasury note yield breached 4.00%. The 10-yr note yield dropped to 3.91% earlier but settled up one basis point to 4.02%. The 2-yr note yield, which hit 4.40% earlier, settled at 4.43%.
Ahead of Tuesday's open, Johnson & Johnson (JNJ), Albertsons (ACI), Lockheed Martin (LMT), Goldman Sachs (GS), Truist (TFC), and Hasbro (HAS) headline the earnings reports.
Market participants will receive the following economic data on Tuesday:
- 9:15 ET: September Industrial Production (consensus 0.1%; prior -0.2%) and Capacity Utilization (Briefing.com consensus 79.9%; prior 80.0%)
- 10:00 ET: October NAHB Housing Market Index (consensus 44; prior 46)
- 16:00 ET: August Net Long-Term TIC Flows (prior $21.40 bln)
Economic data was limited to the October Empire State Manufacturing Survey, which came in at -9.1 versus the prior reading of -1.5. A number below 0.0 is indicative of a contraction in manufacturing activity in the New York Fed region.
Dow Jones Industrial Average: -16.9% YTD
S&P Midcap 400: -18.8% YTD
S&P 500: -22.8% YTD
Russell 2000: -22.7% YTD
Nasdaq Composite: -31.8% YTD
Bond Market Woes Keep Mounting, Spreading Pain to Stocks
The yield on the 10-year U.S. Treasury note settled above 4% last week for the first time since 2008 following another hot inflation reading
Pressure on beaten-down U.S. bonds is showing few signs of relenting, driving Treasury yields to new highs and threatening further pain across financial markets.
With bond investors already confronting their worst returns in living memory, Treasury yields kept on climbing last week in response to more bad news on inflation, stubbornly strong economic-activity data and continuing turmoil in overseas markets. Yields rise when bond prices fall.
By the end of Friday, the yield on the benchmark 10-year U.S. Treasury note was 4.005%. That marked its 11th straight week of gains and first time it had closed above 4% since October 2008, around the height of a financial crisis that ushered in a new era of ultralow interest rates. The yield was 3.990% in recent trading Monday.
Tumbling bond prices and surging yields have hurt not only bonds but stocks this year. The ability to earn a better forward-looking return on Treasurys—which are seen as essentially risk-free if held to maturity—has caused a sharp decline in the prices that investors will pay for riskier assets.
The big problem for investors is that the forces that have battered bonds all year aren’t obviously easing, even as additional challenges mount.
Last Thursday’s consumer-price index report joined a recent litany showing inflation being even hotter than economists had expected. That drove investors to once again lift their expectations for how high the Federal Reserve will raise its benchmark interest rate—the trajectory of which plays a decisive role in determining the level of Treasury yields.
Investors, meanwhile, have been encouraged by moves by the U.K. government to reverse most of its proposed tax cuts—the source of a huge selloff in U.K. bonds that has sent shock waves globally. But they remain generally nervous about foreign demand for Treasurys, as interest rates rise sharply overseas, potentially drawing money away from the U.S.
“The fundamental issue is still one of unprecedented tightening by central banks, as a response to inflation and the fact that inflation is broad-based [and] persistent,” said Priya Misra, head of global rates strategy at TD Securities in New York.
Investors have already made a historic adjustment to their interest-rate bets.
Coming into 2022, most Wall Street banks and investors believed that the Fed would raise its federal-funds rate no more than three times, in traditional 0.25 percentage point increments, to around 0.75% by the end of the year. Now, that rate is above 3%, and interest-rate derivatives show that investors believe that there is a meaningful chance it could reach 5% by March.
Investors’ expectations for the so-called terminal fed-funds rate are especially important for shorter-term Treasurys, such as two-year notes, since the Fed is likely to leave rates at that level for at least several months.
The anticipated terminal rate, however, still powers moves in longer-term Treasurys such as the 10-year note, which tend to have a larger impact on household and business borrowing costs.
Given the high probability of a recession and rate cuts in the next decade, shorter-term yields are currently higher than longer-term yields. Nonetheless, many analysts say, it could be hard for that gap to expand much further, because investors are generally reluctant to buy lower-yielding bonds when they can own higher-yielding ones.
Illustrating this point, the two-year note went from yielding 0.9 percentage point less than the 10-year note in early January to yielding 0.5 percentage point more in early August, according to Tradeweb. Since then, however, the additional yield on the two-year note hasn’t increased even as interest-rate expectations have climbed substantially.
For investors, that means a major debate remains about where interest rates will peak, regardless of what happens afterward.
Treasury yields, more than the fed-funds rate, help determine borrowing costs across the economy. Forecasting the terminal fed-funds rate, therefore, requires determining whether current yields are sufficient to tame inflation, or whether Fed officials will start to project even higher rates to tighten financial conditions further.
Humbled by recent experience, many investors are prepared for the latter outcome, implying an extension of the turmoil in both bond and stock markets.
One reason is recent economic data, which have provided minimal evidence that either economic growth or inflation is subsiding.
As of Friday, a closely watched economic model run by the Federal Reserve Bank of Atlanta suggested that real U.S. gross domestic product grew at a 2.8% pace in the three months ended Sept. 30, a substantial uptick over the previous quarter. According to the Labor Department, core consumer prices rose 0.6% in September from the previous month—keeping annualized inflation far above the Fed’s 2% target.
There is a real risk that the fed-funds rate doesn’t “peak at 5—maybe it’s 5.5, maybe it’s a bit beyond that, and that would be because inflation is enduring, and that’s because consumer spending is holding up and that’s because the labor market is still too strong,” said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union.
Mr. Sullivan said he has remained conservative in the funds he manages, protecting against the risk of rising yields by investing more in cash and floating-rate debt.
Still, other investors say Treasury yields are attractive at current levels, arguing that current economic data can be misleading because of the lagged effects of monetary policy. Any stabilization in yields would help support equities, leaving stock prices to be mainly dictated by the outlook for corporate earnings.
The Fed is doing a lot, but “all of this takes time to make its way into the inflation figures,” said Pramod Atluri, a fixed-income portfolio manager at Capital Group.
Mr. Atluri said bond prices could decline in the near term as the inflation outlook remains uncertain but should rebound over the next 12 months.
The Fed, he added, is unlikely to raise rates much above 5%, but if it did signal that it was moving there, it would likely deepen recession fears, keeping longer-term yields relatively anchored.
ITV explores options for production arm as demand for content booms
UK broadcaster examining whether to sell stake in maker of ‘Love Island’ and ‘Bodyguard’ in bid to unlock its value
ITV is actively reviewing the future of its production arm ITV Studios, including whether to sell a stake in the maker of Love Island and Bodyguard to help lift the broadcaster’s depressed share price.
The London-based company has recently fielded expressions of interest in ITV Studios in what remains a relatively buoyant market for production assets, according to people familiar with the discussions.
Even before the approaches, chief executive Carolyn McCall had been weighing options for the Studios business, which analysts and executives estimate may be worth more than the £2.5bn market capitalisation of its parent ITV, the UK’s biggest commercial broadcaster.
One person who had discussed a Studios sale with McCall said she was “totally fed up” with the stock market overlooking the business and was “open to doing something”.
An ITV insider said a sale probably remained unlikely because of longstanding resistance to breaking up the group’s integrated broadcaster-producer model, but added that the gap in valuations made the option “impossible to ignore”.
Shares in ITV had risen more than 10 per cent by early afternoon on Monday following the news.
ITV Studios, which acts as a holding group for about 60 independent labels across 13 countries, is one of the largest producers of scripted and unscripted shows in Europe. ITV continues to look for acquisitions and has bought a controlling stake in Plimsoll Productions, the natural history programme maker behind A Year on Planet Earth, for £103.5mn in June.
Potential buyers include private equity groups and other large independent producers such as Bertelsmann’s Freemantle or FL Entertainment, the parent company of Banijay.
ITV said its board “continuously reviews opportunities to increase shareholder value, however we don’t comment on speculation”.
Ever since ITV embarked on an ambitious acquisition spree to build out its production arm more than a decade ago, the broadcaster has run periodic evaluations of a potential spin-off or sale.
The fall in ITV’s share price since 2015, which has wiped more than three-quarters of its market value, has revived the appeal of a transaction that might help reset market expectations of the broadcaster’s potential.
McCall acknowledged in July that she was looking for ways to bring ITV out of the shadow of its legacy broadcast business. “I really don’t think we’re recognised not only for the value of the Studios business, but actually for the strength and resilience, and actually how much cash the broadcast business throws off,” she said.
Studios’ operating margin of 13 per cent in the six months to June is significantly ahead of industry peers. Analysts at Citi this summer estimated Studios could be worth approximately £3bn, based on comparable valuations of production businesses.
Some analysts have argued that selling part of Studios would highlight the breadth of ITV’s assets — which spans traditional television, production and ad-supported streaming — and set a “benchmark” to raise the valuation of the whole group. ITV is launching its new streaming platform ITVX this autumn.
Studios reported revenues of £1.8bn last year and adjusted earnings before interest, tax and amortisation of £215mn, which is expected to rise to £246mn in 2022. Only about a third of its sales are commissioned by ITV and most of its revenue is now generated outside the UK.
While the steady stream of ITV commissions is one of the strengths of the production business, pricing could raise potential complications for any minority partner in future. ITV, meanwhile, may be reluctant to cede control of Studios in any joint venture.
Energy billionaire Harold Hamm lifts bid to buy Continental Resources
New offer from shale revolution pioneer values equity of the US oil producer at about $27bn
Energy billionaire Harold Hamm agreed to increase his offer to buy Continental Resources, valuing the equity of the US oil producer at about $27bn.
Hamm, one of the pioneers of the US shale revolution of the past two decades, agreed to pay $74.28 a share in cash to buy the 17 per cent of Continental that his family does not already own.
The new offer, announced on Monday, represents a 13 per cent premium to Continental’s closing price in mid-June before Hamm made his first $70 a share bid and will cost the oil tycoon $4.3bn.
However, the transaction will be entirely financed with Continental’s existing cash on its balance sheet and debt, which means Hamm will not be spending any additional money of his own.
The deal, which has been approved by Continental’s board, will bring the Oklahoma City-based company under the full ownership of its founder, who is currently the chair of its board of directors.
Continental Resources, the largest oil producer in the Bakken shale fields in North Dakota and Montana, was badly hit financially during the early days of the coronavirus crisis in 2020, when a slowdown in demand led its market value to drop to $3bn.
Since then the company has been revived partly as a result of Russia’s invasion of Ukraine, which has pushed up energy prices and generated record cash flows as oil and gas prices leapt.
Hamm said in June that it was in the best interest of Continental, which was founded in 1967 and went public in 2007, to be delisted. “We have determined that the opportunity today is with private companies who have the freedom to operate and aren’t limited by public markets, similar to the way that we operated approximately 15 years ago,” he said then in a letter to employees.
Continental shares were up 8.3 per cent in pre-market trading on Monday morning.