U.S. equities are higher in afternoon action following a recent plunge to lows not seen since 2020. However, volatility remains—notably in the currency and bond markets—as the global markets react to the Bank of England's (BoE) decision to purchase long-term bonds to try to ease pressures on its financial system. The BoE's action comes as the British pound has tumbled to multi-decade lows and bond yields have surged as global central banks, led by the Fed, have tightened monetary policies aggressively to try to fight inflation. Treasury yields are dropping, and the U.S. dollar is sharply lower amid the volatile action in the foreign exchange markets. Crude oil and gold prices are rallying, with the former bolstered by the hurricane landfall in Florida. In equity news, Biogen is surging after reporting that a study showed its experimental Alzheimer's drug significantly slowed the progression of the disease, while V.F. Corp lowered its full-year earnings guidance. In economic news, mortgage applications and pending home sales declined as interest rates continued to spike, the trade deficit narrowed more than forecasts, and wholesale inventories rose much more than expected. Europe ended mixed in choppy trading after the BoE's decision, and Asia finished broadly lower, led by Hong Kong, with the global markets remaining skittish amid the volatility in the currency and bond markets.
At 12:50 p.m. ET, the Dow Jones Industrial Average the S&P 500 Index are rising 1.5%, while the Nasdaq Composite is advancing 1.3%. WTI crude oil is gaining $3.05 to $81.55 per barrel, and Brent crude oil is advancing $2.61 at $87.48 per barrel. The gold spot price is trading $28.50 higher to $1,664.70 per ounce, and the Dollar Index is decreasing 0.8% to 113.69.
Biogen Inc. (BIIB $271) is surging over 35% after reporting, along with its Japanese partner Eisai Co. Ltd. (ESALY $64), that a study showed their experimental Alzheimer's drug significantly slowed the progression of the disease. ESALY is jumping nearly 60% and the news is also boosting other drugmakers' stocks.
V.F. Corporation (VFC $34) lowered its full-year earnings guidance, citing ongoing uncertainty in the current environment, weaker-than-expected back-to-school performance at its Vans footwear segment, and increasing inventories leading to a more promotional environment in North America in the fall. The company also announced a non-cash impairment charge on its Supreme unit—the apparel and footwear company—as a result of higher interest rates and foreign currency fluctuations. Shares are lower.
The S&P 500 Index dropped to levels not seen since 2020 earlier this week with inflation pressures persisting and forcing the Fed to aggressively tighten monetary policy as discussed in the article, Stock Market Volatility: Worries Mount. Meanwhile, as the markets gear up for the start of Q3 earnings season in a couple weeks, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Earnings: Trampled Under Foot? how the bear market has been driven by multiple compression, making valuations look relatively compelling, but expected weakness in earnings may limit the upside potential for stocks.
Mortgage applications decline, pending home sales drop again, bond yields falling
The MBA Mortgage Application Index declined 3.7% last week, following the prior week's increase of 3.8%. The index decreased as a 10.9% drop for the Refinance Index was accompanied by a 0.4% dip for the Purchase Index. The decline came as the average 30-year mortgage rate advanced 27 basis points (bps) to 6.52%, which is up 342 bps versus a year ago.
In other housing news, pending home sales fell more than expected, dropping by 2.0% month-over-month (m/m) in August, versus the Bloomberg consensus estimate of a 1.5% decline and following July's favorably revised 0.6% decrease. Sales fell 22.5% year-over-year, versus estimates of a 24.5% drop, and on the heels of July's positively revised 22.2% fall. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales, as properties typically go under contract a month or two before they are sold.
The advance goods trade balance showed that the August deficit narrowed more than expected to $87.3 billion, versus the Bloomberg consensus estimate calling for it to contract slightly to $89.0 billion from July's upwardly revised shortfall of $90.2 billion.
Preliminary wholesale inventories rose 1.3% month-over-month (m/m) for August, compared to expectations of a 0.4% gain, and versus July's unrevised 0.6% increase.
Treasury yields are lower, with the yield on the 2-year note down 17 bps to 4.14%, the yield on the 10-year note declining 20 bps to 3.77%, and the 30-year bond rate decreasing 14 bps to 3.69%.
Bond yields have jumped recently, and the U.S. dollar has rallied back to fresh multi-decade highs after the Fed hiked rates by 75 bps for a third-straight meeting last week. Schwab's Chief Fixed Income Strategist Kathy Jones discusses the Fed's decision in her latest article, With Inflation Offsides, the Fed Keeps Hiking, which included downgraded economic growth forecasts and an increased unemployment rate outlook, as inflation remains the Central Bank's primary concern. She also provides analysis of the greenback in her commentary, The Strong Dollar: Can It Continue?
Europe mixed as currency and bond markets were in focus after the BoE's action
Stocks in Europe finished mixed, bouncing back from early losses as the markets reacted to the announcement that the Bank of England (BoE) will buy long-term bonds to try to stabilize its financial markets. Bloomberg noted that the BoE took these actions after warnings from investment banks and fund managers of the stress caused by the dramatic moves in the bond and currency markets for some time. The British pound and the euro have dropped sharply this year, with the former hitting multi-decade lows, and bond yields in the region have surged. The moves have come as central banks—led by the Fed—have tightened monetary policies aggressively—including the BoE—to try to arrest persisting global inflation pressures. The pound overcame early pressure and was sharply higher versus the U.S. dollar after the BoE's action but U.K. bond yields plunged. The euro was also higher compared to the greenback and bond yields in most of the Eurozone dropped.
Economic data in the region was on the negative side, with German consumer confidence dropping to a new record low for a fourth-straight month. Additionally, French consumer confidence fell more than expected, along with Italian consumer confidence. The energy crisis in the region, stemming from the ongoing war in Ukraine, has weighed on sentiment in the region and boosted inflation pressures. As such, the U.K. announced the largest tax cuts since the 1970s, which has been said to have amplified the moves in the currency and bond markets, which forced the BoE's decision today. Further complicating the energy crisis, yesterday the Nord Stream pipeline system—which transports Russian gas throughout the region—suffered damage that has led to several gas leaks in the Baltic Sea. This damage is solidifying concerns that Europe may have to survive the winter without significant Russian gas flows.
Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, What's Next: Good, Bad, & Ugly, that the persistence of global inflation could determine which of the three paths central banks may follow and which market qualities investors might consider for their portfolios.
The U.K. FTSE 100 Index was up 0.3%, France's CAC-40 Index ticked 0.2% higher, Germany's DAX Index rose 0.4%, and Switzerland's Swiss Market Index gained 0.9%, while Spain's IBEX 35 Index was little changed, and Italy's FTSE MIB Index declined 0.5%.
Asia falls as global markets remain skittish amid volatility in the currency markets
Stocks in Asia finished broadly lower with the global markets continuing to be uneasy amid the sharp rise in the U.S. dollar, which has weighed on the Japanese yen and China's currency. Moreover, bond yields around the globe have moved solidly higher to exacerbate sentiment and concerns about a global recession. The tightening world financial conditions has come as central banks in North America, the Eurozone, and the U.K. have moved to make monetary policies restrictive to fight persisting inflation pressures. The actions have been led by the ultra-aggressive measures out of the U.S., which has the U.S. dollar rallying to fresh multi-decade highs. Adding further downside pressure on currencies in Japan and China, the Bank of Japan and China's central bank have bucked the trend, as China even loosened policy to try to boost the world's second-largest economy that has also been hampered by the impact of COVID-related lockdowns, regulatory crackdowns, real estate issues, and elevated geopolitical tensions with the U.S. Schwab's Jeffrey Kleintop provides commentary on China's situation in his article, China Q&A: Top 5 Questions, discussing various topics including inflationary concerns, currency movements, government policies, and more.
In economic news in the region, Australia's retail sales rose at a slightly larger amount than anticipated for August, Japan's August machine tool orders were unrevised at a 10.7% y/y gain, while South Korea's retail sales grew solidly for last month. Losses for Japanese markets may have been limited by a rally in shares of Eisai Co. Ltd on the results of its Alzheimer's treatment, along with its partner Biogen.
Japan's Nikkei 225 Index declined 1.5%, with the yen sitting at multi-decade lows versus the greenback given the divergence of monetary policies. The Hong Kong Hang Seng Index led to the downside, tumbling 3.4%, and China's Shanghai Composite Index traded 1.6% lower. Australia's S&P/ASX 200 Index decreased 0.5%, South Korea's Kospi Index fell 2.5%, and India's S&P BSE Sensex 30 declined 0.9%.
© Charles Schwab
Read more commentaries by Charles Schwab
