Nasdaq leads uncertain markets as higher bond yields undermines valuations

Stocks were mixed by midday, led by Nasdaq, with traders focused on a deteriorating Chinese economy, and news from this weekend's Federal Reserve Jackson Hole, Wyoming Symposium. Weakness in bond markets is a creeping worry for equities, undercutting relative valuations, but also offering more attraction to dollar-based investors.

Bottom-line: risk-hold.

TODAY’S MAJOR NEWS

Fed’s symposium unlikely to change interest rate outlook

This week’s focus is expected to be on Jackson Hole, Wyoming, where the Kansas City Federal Reserve district will host its annual symposium for the Fed, featuring a long list of academic speakers but rarely much input from experienced business leaders. The current economist group think, handicapping policymakers, is their desire to create that ever-allusive utopia economy. However, Wall Street will be focused on Friday’s speech by Fed Chair Jerome Powell for indications of the central bank’s next move in shaping monetary policy which, on the basis of recent economic data, will continue to feature high interest rates.

China cuts rates, but was it too little?

China’s central bank cut its 1-year interest rate by 10 basis points, but local gains were limited –  the Shanghai Composite index fell 1.2% after the announcement, and the Yuan was weaker. Wall Street also took note that China responded to “stopover” stop in the US by a Taiwanese regional leader by quickly deploying 45 aircraft and nine vessels to briefly surround Taiwan over the weekend, escalating tensions with the West.

Magnificent Seven hit hardest in August sell-off

Several S&P 500 stocks accounted account for half of the more than the 4.9% decline so far this month, worse than average for this time of year, with the tech ‘Magnificent Seven’ badly mauled. Apple is perhaps the best example, down 11% in August, with a still eye watering 29x trailing PE multiple, rewarding flat earnings in the current fiscal year ended in September.  Tesla is off 7.5%, but is still on a 62x PE, rewarding earnings expected to fall 15% this fiscal year. One explanation for this sell-off in market leaders is the rising discount rate, in higher bond yields, which hit highly rated growth stocks harder.

August PMIs give first look at global economies

August Purchasing Manager’s Indexes (PMIs) for August are due from the major developed world economies this week, providing a ‘timely proxy for GDP’: Japan’s data will offer an unofficial contrast to trade pressure via exchange rates, the UK’s figures will cater to outright expectations of recession, and the US figures will provide data for the Federal Reserve.

TODAY’S MAJOR MARKETS

Equity markets recover after weak start

• Equity markets were mixed this morning, with the Nasdaq up 0.7%, the Russell 2000 off 0.7%, and the S&P 500 unchanged
• Global markets were modestly ahead, with Nikkei 225 up 0.4%, the DAX up 0.2% and the FTSE 100 unchanged
• The VIX, Wall Street’s fear index, rose to 17.9

Bond yields rise to new highs, dollar unchanged

• The dollar index was flat against a basket of currencies to 103.4, with the Euro and Sterling cross rates up 0.2% and 0.1%, while the Yen fell 0.6%
• Bonds approached important psychological levels, with 2-year bonds a shade below 5% and 10-year bonds at a 16-year high at 4.34%

Oil and Silver lead commodity markets

• Crude oil prices continued to rally, up 0.5% to $81.6 per barrel
• Gold was unchanged after recent weakness, at $1,919 per ounce, while Silver rose 2.2% to $23.2 per ounce

• Russia continues to dump cheap wheat on the world market, which weighs on US wheat futures
• Soybeans are stronger on the hot dry weather pattern currently over the Midwest
• Corn prices are following wheat lower in the absence of supportive headlines

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com 

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com