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Beyond the Numbers

Worries About Inflation, Rising Bond Yields May Weigh On Wall Street
2/22/2021 8:47 AM

The major U.S. index futures are currently pointing to a lower opening on Monday after stocks ended the previous session nearly unchanged.

The downward momentum on Wall Street comes amid concerns about the outlook inflation following the recent advance by bond yields.

The yield on the benchmark ten-year note ended last Friday’s trading at its highest closing level in almost a year and is seeing further upside in early trading.

Bond yields remain at historically low levels, but the recent increase may still spook investors already concerned that stocks are overbought.

A notable drop by shares of Boeing (BA) may weigh on the Dow after dozens of the aerospace giant’s 777 jets were grounded.

The move came after an engine failed on a United Airlines (UAL) flight on Saturday, forcing the 777 to make an emergency landing at Denver International Airport shortly after takeoff.

Overall trading activity may be somewhat subdued, however, as traders may be reluctant to make any significant moves ahead of two days of Congressional testimony by Federal Reserve Chair Jerome Powell.

Powell is likely to reiterate that the Fed plans to maintain easy monetary policy for the foreseeable future as the economy continues to recover from the coronavirus pandemic.

The Fed has recently signaled that it is not concerned about inflation, suggesting that inflation should exceed its 2 percent target for some time before the central bank considers raising interest rates.

After moving mostly higher early in the session, stocks gave back ground over the course of the trading session on Friday. The major averages pulled back off their best levels of the day before closing near the unchanged line.

The major averages finished the day with a mixed performance. While the S&P 500 dipped 7.26 points or 0.2 percent to 3,906.71, the Dow crept up 0.98 points or less than a tenth of a percent to 31,494.32 and the Nasdaq inched up 9.10 points or 0.1 percent to 13,874.46.

For the holiday-shortened week, the Dow crept up by 0.1 percent, while the S&P 500 slid by 0.7 percent and the Nasdaq slumped by 1.6 percent.

Continued optimism about more fiscal stimulus contributed to the early strength on Wall Street, as new Treasury Secretary Janet Yellen urged lawmakers to approve President Joe Biden's $1.9 trillion relief package.

Yellen suggested during an interview with CNBC on Thursday that the Biden administration's proposal could help the U.S. get back to full employment within a year.

The former Federal Reserve Chair also dismissed Republican complaints about the size of the proposed bill, arguing, "The price of doing too little is much higher than the price of doing something big."

The comments from Yellen came after House Speaker Nancy Pelosi, D-Calif., said House Democrats aim to pass their version of the $1.9 trillion relief bill before the end of the month.

Democrats have been hoping to pass a new stimulus bill with Republican support but may be forced to use the process known as reconciliation to approve a relief package without GOP votes.

Traders have generally remained optimistic about more stimulus under Biden and the Democrat-controlled Congress, helping propel stocks to new record highs.

However, buying interest waned over the course of the session amid a jump in treasury yields, with the yield on the benchmark ten-year note reading its highest closing level in almost a year.

The recent increase in treasury yields has raised concerns about the outlook for interest rates amid worries about the prospects of higher inflation.

In U.S. economic news, the National Association of Realtors released a report showing another unexpected increase in U.S. existing home sales in the month of January.

NAR said existing home sales rose by 0.6 percent to an annual rate of 6.69 million in January after climbing by 0.9 percent to a revised rate of 6.65 million in December. Compared to the same month a year ago, existing home sales in January were up by 23.7 percent.

The continued growth came as surprise to economists, who had expected existing home sales to tumble by 2.2 percent to a rate of 6.61 million from the 6.76 million originally reported for the previous month.

Despite the lackluster close by the broader markets, airline stocks showed a substantial move to the upside on the day. The NYSE Arca Airline Index soared by 3.7 percent to its best closing level in almost a year.

Considerable strength was also visible among steel stocks, as reflected by the 2.7 percent spike by the NYSE Arca Steel Index.

Semiconductor stocks also saw significant strength on the day, driving the Philadelphia Semiconductor Index up by 2.4 percent.

Applied Materials (AMAT) helped lead the sector higher after the semiconductor equipment maker reported better than expected fiscal first quarter results.

Banking, housing and oil service stocks also showed strong moves to the upside, while notable weakness emerged among utilities, pharmaceutical and retail stocks.

Commodity, Currency Markets

Crude oil futures are climbing $0.60 to $59.84 a barrel after plunging $1.28 to $59.24 a barrel last Friday. Meanwhile, after rising $2.40 to $1,777.40 an ounce in the previous session, gold futures are jumping $17.20 to $1,794.60 an ounce.

On the currency front, the U.S. dollar is trading at 105.47 yen versus the 105.45 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is trading at $1.2144 compared to last Friday’s $1.2119.

Asia

Asian stocks ended mostly lower on Monday amidst lingering worries about inflation and high valuations following recent strength in the markets.

Chinese stocks fell sharply on concerns over high valuations and possible policy tightening. The benchmark Shanghai Composite Index tumbled 53.72 points, or 1.5 percent, to 3,642.44 despite the country's central bank leaving its benchmark lending rate for corporate and household loans unchanged for the 10th straight month on Saturday. Hong Kong's Hang Seng Index ended down 324.90 points, or 1.1 percent, at 30,319.83.

Meanwhile, Japanese shares bucked the regional trend to close higher as optimism about an economic recovery from the coronavirus pandemic prompted buying in cyclical stocks with cheap valuations.

Chip-related shares surged the most, with Tokyo Electron soaring 6.3 percent. Market heavyweight SoftBank Group advanced 1.7 percent

The Nikkei 225 Index rose 138.11 points, or 0.5 percent, to 30,156.03, while the broader Topix closed 0.5 percent higher at 1,938.35.

Australian markets fluctuated before ending slightly lower. The benchmark S&P/ASX 200 Index slipped 12.90 points, or 0.2 percent, to 6,780.90, while the broader All Ordinaries Index ended down 2.40 points at 7,061.60.

A rising Aussie dollar pulled down healthcare companies, with heavyweight CSL losing 2.4 percent. Fuel refiner Ampol lost 2.7 percent after it posted a full-year loss of $485 million. Woodside Petroleum and Santos fell over 1 percent. Banks fell broadly, with Westpac losing 1.5 percent and NAB giving up 2.2 percent.

Miners BHP, Fortescue Metals Group and Rio Tinto rose between 3.2 percent and 3.6 percent as copper prices climbed above $9,000 a ton for the first time in more than nine years on concerns over a historic shortage. Copper miner OZ Minerals jumped 7 percent.

Macquarie Group climbed 3.4 percent after the investment bank raised its earnings forecast. Steelmaker Bluescope gained 2.3 percent after it reported a 78 percent surge in first-half profit.

Seoul stocks ended lower as concerns over rising inflation overshadowed strong export data. South Korea's exports rose 16.7 percent year-over-year in the first 20 days of February on strong shipments of chips and autos, customs agency data showed.

The benchmark Kospi dropped 27.87 points, or 0.9 percent, to 3,079.75 points. Celltrion and Naver fell around 3 percent, while chipmaker SK Hynix advanced 2.6 percent. Rechargeable battery maker Samsung SDI slumped 4 percent.

Europe

European shares have fallen on Monday amid concerns accelerated vaccine rollouts and aggressive fiscal stimulus will spur a faster economic revival and stoke inflation.

The dollar slid to multi-year lows against sterling and rival currencies, while benchmark U.S. Treasury yields hit a nearly one-year high as the reflation trade emerged as a key theme.

The German DAX has slid 0.6 percent even as survey results from the ifo Institute showed German business confidence strengthened in February.

The business confidence index rose to 92.4 from 90.3 in the previous month. This was better than the economists' forecast of 90.5.

France's CAC 40 Index has also fallen by 0.5 percent. The country is set to increase self-isolation times for Covid-positive cases from seven to 10 days due to uncertainty over the new variants, the health minister announced over the weekend.

The U.K.'s FTSE 100 is also down by 0.6 percent as investors await a roadmap out of lockdown set to be announced by Prime Minister Boris Johnson in a speech to Parliament later today.

In corporate news, Continental AG shares have edged up slightly. The German automotive parts maker suspended annual dividend after reporting a net loss for 2020.

French car parts maker Faurecia has moved to the downside. The company said it is targeting sales close to 25 billion euros ($30.29 billion) and an operating margin above 8 percent of sales by 2025.

All eyes will be on European Central Bank President Christine Lagarde's speech on stability, economic co-ordination and governance in the EU later in the day.

Federal Reserve Chairman Jerome Powell will deliver his semi-annual testimony on the economy before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.

Powell is likely to reiterate that the central bank will maintain an easy monetary policy to support the economy recovering from the pandemic.

U.S. Economic Reports

The Conference Board is scheduled to release its report on leading economic indicators in the month of January at 10 am ET. Economists expect the leading economic index to rise by 0.3 percent.

Stocks In Focus

Shares of Cooper Tire (CTB) are moving sharply higher in pre-market trading after the tire maker agreed to be acquired by rival Goodyear Tire (GT) for $2.8 billion in cash and stock.

Special purpose acquisition company Starboard Value Acquisition (SVAC) is also likely to see initial strength after announcing a definitive business combination agreement with data center company Cyxtera Technologies.

Shares of People's United Financial (PBCT) are also moving significantly higher in pre-market trading after the bank agreed to be acquired by M&T Bank (MTB) in an all-stock deal valued at $7.6 billion.

Entertainment company Discovery (DISCA) may also move to the upside after reporting better than expected fourth quarter results and saying its Discovery+ streaming service is on pace to have 12 million subscribers by the end of the month.
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