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Stocks Trim Early Gains As Yields Surge
03-Oct-18 16:30 ET
Dow +54.45 at 26828.39, Nasdaq +25.54 at 8025.07, S&P +2.08 at 2925.35

https://www.briefing.com/investor/markets/stock-market-update/2018/10/3/stocks-trim-early-gains-as-yields-surge.htm

[BRIEFING.COM] The S&P 500 flirted with record territory on Wednesday morning, but pulled back in the afternoon as investors expressed concern over a surge in bond yields. The S&P 500 finished the session with a slim gain of 0.1% after trading as high as +0.6% intraday.

As for the other major indices, the Dow managed to keep 0.2% of its 0.7% intraday gain, closing at a new record high for the second day in a row. The tech-heavy Nasdaq finished +0.3%, and the small-cap Russell 2000 finished +0.9%, undoing some of the damage done on Monday and Tuesday.

Investors awoke to encouraging news out Italy, where the new anti-establishment government reportedly decided to cede to some of the EU's budget demands. Italy's budget-deficit target will be reduced from 2.4% of GDP in 2019 to 2.2% in 2020 and then to 2.0% in 2021. That news helped alleviate fears of an EU-Italy showdown and pushed stock futures and Treasury yields higher overnight.

Yields continued to climb after the September ADP Employment Change report, which is a prelude to Friday's nonfarm payrolls reading, showed an estimated 230K positions were added to private sector payrolls -- well above the Briefing.com consensus estimate of 184K -- and after the ISM Services Index for September hit a record high of 61.6% (Briefing.com consensus 58.2%), clearly indicating that business activity in the service-providing sector of the economy is strong.

Stocks were able to hold on to opening gains throughout the morning, but started wavering in the afternoon as Treasury yields continued to climb, with the benchmark 10-yr yield crossing a high-water mark dating back to July 2011. The 10-yr yield closed at 3.16% -- a daily gain of ten basis points -- while the more Fed-sensitive 2-yr yield rallied to 2.86% (+6 bps).

Unsurprisingly, the financial sector, which often moves in tandem with Treasury yields, was among the top-performing S&P 500 groups on Wednesday with a gain of 0.8%.

The energy sector advanced 0.8% as well, benefiting from the continued rise in the price of crude oil; WTI crude futures jumped another 1.6% on Wednesday to $76.39/bbl, marking a new four-year high. Wednesday's rise in oil prices came despite the Department of Energy's weekly inventory report showing an unexpected build of 8.0 million barrels -- the largest weekly increase of the year.

On the downside, six of 11 sectors finished in the red, with utilities (-1.2%), real estate (-1.0%), and consumer staples (-1.1%) being the worst performers.

In individual stocks, General Motors (GM 34.00, +0.70) climbed 2.1% after announcing that it will be partnering with Honda Motor (HMC 29.37, -1.09) to build autonomous vehicles. Honda shares fell 3.6%. Separately, struggling retailer J.C. Penney (JCP 1.62, +0.06) jumped 3.9% after appointing a new CEO, Jill Soltau, who is the former President and CEO of Joann Stores, and homebuilder Lennar (LEN 46.24, -0.53) dropped 1.1% after reporting earnings.

Rehashing Wednesday's economic data, which included the ISM Services Index for September, the ADP Employment Change report for September, and the weekly MBA Mortgage Applications Index:

The ISM Non-Manufacturing Index checked in at 61.6% for September (Briefing.com consensus 58.2%), up from 58.5% in August.
The key takeaway from the report is that it clearly indicates business activity is strong for the service-providing sector of the economy, which accounts for a much larger slice of economic activity than the manufacturing sector does.
The ADP National Employment Report showed an increase of 230,000 in September (Briefing.com consensus 184,000), and the August reading was revised to 168,000 (from 163,000). The ADP reading is seen as a prelude to the BLS's nonfarm payrolls figure (Briefing.com consensus 184,000), which will be released on Friday.
The weekly MBA Mortgage Applications Index was flat to follow last week's increase of 2.9%.

Looking ahead, investors will receive weekly Initial Claims and August Factory Orders on Thursday.

Nasdaq Composite +16.3% YTD
S&P 500 +9.4% YTD
Russell 2000 +8.8% YTD
Dow Jones Industrial Average +8.5% YTD