U.S. equities are beginning the new week sharply higher, getting a boost from the U.K.'s decision to abandon nearly all its tax cut plans. The moves come amid hopes of some stabilization in the global bond and currency markets which have seen increased volatility in the wake of the initial proposal. Treasury yields are lower, and the dollar is declining amid strength in both the British pound and the euro. Crude oil prices are seeing modest gains, and gold is trading solidly to the upside. Bank of America eclipsed quarterly expectations on a jump in net interest income, while Q3 earnings season is set to kick into a higher gear this week. The economic calendar is light but showed manufacturing activity in the New York region slowed more than expected. Markets in Asia finished mixed amid continued recession worries, while stocks in Europe are cheering the U.K. tax cut decision.
At 10:50 a.m. ET, the Dow Jones Industrial Average is jumping 1.8%, the S&P 500 Index is rallying 2.7%, and the Nasdaq Composite is soaring 3.3%. WTI crude oil is rising $0.57 to $86.20 per barrel, and Brent crude oil is increasing $0.55 at $92.18 per barrel. The gold spot price is trading $18.80 higher to $1,667.70 per ounce, and the Dollar Index is down 0.8% to 112.47.
Bank of America Corp. (BAC $33) reported adjusted Q3 earnings-per-share (EPS) of $0.81, above the $0.78 FactSet estimate, with revenues rising 7.6% year-over-year (y/y) to $24.5 billion, north of the Street's forecast of $23.5 billion. Profits were 8% lower versus last year as the company booked $738 million in credit losses for the quarter. Net interest income for the bank rose 24% y/y to $2.7 billion amid the rise in interest rates. Chairman and CEO Brian Moynihan said, "Our U.S. consumer clients remained resilient with strong, although slower growing, spending levels and still maintained elevated deposit amounts." Shares are higher.
Volatility in the markets remains after another dose of inflation data last week that showed price pressures persist and has forced the Fed to aggressively tighten monetary policy. Higher interest rates lead to a stronger U.S. dollar, which is likely to add to global economic pressure and weigh on corporate profits as discussed in the latest Schwab Market Perspective: No Stopping the Fed. Meanwhile, as Q3 earnings season next week, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her 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.
Additionally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, The End of Earnings Growth?, how the earnings outlook is dimming as the economy slows, which could result in cuts to earnings forecasts and downside for stocks. However, Jeff points out that U.K. earnings have been a surprising outperformer.
Treasury yields lower amid light economic calendar
The Empire Manufacturing Index, a measure of activity in the New York region, showed the index declined more than expected, moving further into contraction territory (a reading below zero) this month. The index fell to -9.0 from the -1.5 reading that was posted in September and compared to estimates of a decline to a level of -4.3.
Treasury yields are lower, with the yield on the 2-year note down 7 basis points (bps) to 4.43%, the yield on the 10-year note declining 5 bps to 3.96%, and the 30-year bond rate decreasing 1 bp to 3.96%.
Volatility has spiked recently as markets react to concerns about the ability of the global economy to cope with the rise in bond yield across the globe as monetary policies tighten. The Fed has led the charge and Schwab's Chief Fixed Income Strategist Kathy Jones discusses this in her latest article, Markets to Fed: Slow Down, You Move Too Fast, and how, if these trends continue, the Fed may end up slowing its pace of tightening—but not stopping it.
Along with rising bond yields, the U.S. dollar has rallied, and Schwab’s Liz Ann Sonders examines the impact of the greenback’s rise in her article, Ripple(s) From Surging Dollar. She discusses how while a spike in global market volatility has prompted some investors to think a Fed response is imminent, we caution against thinking that intervention is a bullish development.
While today's economic docket is light, things will begin to heat up tomorrow and will offer some key data points that could shape market action. Housing will be in focus, courtesy of the NAHB Housing Market Index, housing starts and building permits, existing home sales, as well as the weekly read on the MBA Mortgage Applications Index. Also of note will be the Federal Reserve's Beige Book—an anecdotal read on national business activity used by policymakers to prepare for their next monetary policy decision set to come on November 2—as well as the Fed's industrial production and capacity utilization report for September. Other items of note include the Leading Economic Index (LEI) for last month, and initial jobless claims for the week ended October 15.
Europe higher in wake of U.K. tax plan U-turn
Stocks in Europe are trading to the upside across the board in late-day action, with the markets appearing to cheer the U.K.'s about-face in its mini budget. On his first day on the job, new U.K. Finance Minister Jeremy Hunt announced that almost all of its planned tax cuts will be scrapped, including cuts to the lowest tax bracket, in a bid to appease the markets that have seen increased volatility since the introduction of the plans. Additionally, Hunt said that the energy package designed to subsidize consumer and business energy bills will only be in place through April and then will be reviewed in order to be less of a burden to taxpayers. The British pound is solidly higher versus the U.S. dollar following the announcement, and bond yields in the U.K. are tumbling. The euro is also gaining against the greenback and bond yields in the region are falling. Economic news was light, with consumer prices in Italy rising in line with expectations but remaining elevated.
The worrisome inflation picture has been exacerbated by the ensuing energy crisis in the region due to the escalating war in Ukraine. Schwab's Jeffrey Kleintop notes in his 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 is up 1.4%, France's CAC-40 Index and Italy's FTSE MIB Index, and Germany's DAX Index are gaining 2.1%, Spain's IBEX 35 Index is rising 2.6%, and Switzerland's Swiss Market Index is advancing 1.9%.
Asia mixed amid continued recession fears
Stocks in Asia finished mixed as recession fears continued to weigh on sentiment. The uneasiness comes amid expectations that central banks across the globe will continue to tighten monetary policy, with several countries in the region set to report inflation data this week. While other major central banks tighten policy, Japan has maintained its accommodative stance and China has actually provided further stimulus, which has weighed on their respective currencies. 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 light economic news in the region, industrial production in Japan increased for August and the nation's Tertiary Industry Index rebounded from last month's decline and above expectations.
Japan's Nikkei 225 Index fell 1.2%, with the yen remaining near 30-year lows versus the U.S. dollar. China's Shanghai Composite Index gained 0.4%, and the Hong Kong Hang Seng Index advanced 0.2%. South Korea's Kospi Index rose 0.3%, Australia's S&P/ASX 200 Index lost 1.4%, and India's S&P BSE Sensex 30 moved 0.9% higher.
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