Key Takeaways
- US stocks rallied on Monday, driven by positive news on a tentative US-China trade agreement that eased tariff concerns.
- The Federal Open Market Committee (FOMC) meeting this week is expected to result in a 25 basis point rate cut.
- Major tech companies, including Alphabet, Meta, Microsoft, Apple, and Amazon, are scheduled to report earnings this week.
- Trade tensions with Canada escalated following President Trump’s announcement of a potential new tariff on US imports from Canada.
- The ongoing US government shutdown continues to impact market sentiment and delay economic data releases.
Market Performance Overview
The S&P 500 Index experienced a notable rise of +1.22% on Monday. Similarly, the Dow Jones Industrials Index climbed by +0.69%, and the Nasdaq 100 Index saw a significant increase of +1.82%. December E-mini S&P futures (ESZ25) also rose by +1.21%, while December E-mini Nasdaq futures (NQZ25) gained +1.83%.
US-China Trade Deal Boosts Sentiment
US stocks experienced a sharp rally on Monday following the announcement that US and Chinese negotiators, after meeting over the weekend in Malaysia, had reached a tentative trade agreement. This deal is slated for finalization at the upcoming summit between Presidents Trump and Xi, scheduled to take place on the sidelines of the ASEAN conference in Malaysia this Thursday.
Treasury Secretary Bessent indicated that this agreement effectively removes the threat of a 100% tariff on US imports from China, which was scheduled to take effect on November 1. Additionally, China has agreed not to restrict rare earth metal exports for at least a year and to purchase a substantial quantity of US soybeans. Progress was also made on shipping fees and US demands for China to curb the export of fentanyl and its precursors. Discussions may also lead to an agreement allowing US consumers to continue accessing TikTok.
Key Economic Events and Earnings on the Horizon
This week is packed with significant economic events. The FOMC is set to convene on Tuesday and Wednesday, with expectations pointing to a -25 basis point cut in the federal funds rate target. Furthermore, five of the Magnificent Seven companies are scheduled to release their earnings reports. Alphabet, Meta, and Microsoft are due on Wednesday, followed by Apple and Amazon.com on Thursday.
Market sentiment also received some carry-over support from the September US CPI report released last Friday. Both the nominal and core figures registered at +3.0% year-over-year, slightly below the expected +3.1% year-over-year for both metrics.
Trade Tensions with Canada Emerge
Trade relations with Canada presented a negative factor for stocks on Monday. President Trump announced on Saturday his intention to impose a new 10% tariff on US imports from Canada, a retaliatory measure for an anti-tariff advertisement released by the provincial government of Ontario the previous week.
Initially, Mr. Trump had stated he was merely halting trade negotiations with Canada due to the advertisement. However, he escalated the response over the weekend by imposing the new tariff, even after Ontario agreed to pause the ad campaign. The advertisement featured former US President Reagan in a 1987 address advocating for free trade and opposing tariffs, characterizing them as outdated and detrimental to innovation, prices, and American workers.
Mr. Trump alleged the ad was deceptive and aimed at influencing the US Supreme Court ahead of oral arguments on November 5 concerning the legality of his reciprocal tariffs. Lower courts had previously found these tariffs illegal, ruling they were based on a dubious claim of emergency authority. If the Supreme Court upholds these rulings, the US government would be required to refund collected tariffs, and Mr. Trump’s authority to impose tariffs would be constrained to established sections of US trade law.
Impact of the Government Shutdown
The US government shutdown has now entered its fifth week, continuing to exert pressure on market sentiment and the broader US economy. The shutdown has led to delays in the release of crucial government reports, including recent weekly unemployment claims, the September unemployment and payroll data, the August trade balance, September retail sales, September PPI, September housing starts, September industrial production, and September leading indicators, among others.
Bloomberg Economics estimates that approximately 640,000 federal workers will be furloughed during the shutdown. This scenario is projected to increase jobless claims and potentially raise the unemployment rate to 4.7%.
Focus on Q3 Earnings Season
Markets are keenly focused on the ongoing Q3 earnings season. According to Bloomberg Intelligence, 84% of S&P 500 companies that have reported thus far have surpassed profit forecasts, indicating the strongest quarter since 2021. However, Q3 profits are anticipated to have grown by +7.2% year-over-year, representing the smallest increase in two years. Additionally, Q3 sales growth is projected to slow to +5.9% year-over-year, down from +6.4% in Q2.
International Markets Show Gains
Overseas stock markets concluded Monday on a positive note. The Euro Stoxx 50 index closed up by +0.64%. China’s Shanghai Composite registered a gain of +1.18%, and Japan’s Nikkei Stock 225 rose by +2.46%.
Interest Rates Outlook
December 10-year T-notes (ZNZ5) saw a slight increase of +0.5 tick on Monday, with the 10-year T-note yield falling by -1.2 basis points to 3.989%. Initially, T-note prices declined due to the US-China trade agreement, which diminished the safe-haven demand for Treasury securities and was viewed as positive for both economies. The rally in US stocks also applied pressure.
However, T-note prices recovered later in the day as the 10-year inflation expectations rate decreased by -1.1 basis points to 2.288%. T-notes are receiving support from the ongoing US government shutdown. This shutdown could lead to increased job losses, reduced consumer spending, and a weakened US economy, potentially paving the way for the Federal Reserve to continue its interest rate cuts.
Market participants are pricing in a 98% probability of a -25 basis point rate cut at this week’s FOMC meeting on October 28-29. European government bond yields closed lower, with the 10-year German bund yield falling by -1.0 basis point to 2.616% and the 10-year UK gilt yield dropping 3.0 basis points to 4.402%.
Interest rate swaps indicate a 1% chance of a -25 basis point rate cut by the European Central Bank (ECB) at its next policy meeting on October 30.
US Stock Movers
All of the Magnificent Seven stocks closed higher on Monday. Tesla (TSLA) led the gains with a +4.3% increase, followed by Alphabet (GOOG) at +3.6%. Nvidia (NVDA) and Apple (AAPL) also recorded gains exceeding +2%.
Semiconductor Stocks Surge
Chip stocks broadly traded higher on Monday. Qualcomm (QCOM) experienced an impressive +11% surge following the announcement of a new AI chip and computer line designed to compete with Nvidia. Marvell Technology (MRVL) rose by over +5%, and Arm Holdings (ARM) climbed more than +4%. ON Semiconductors (ON), Lam Research (LRCX), and Intel (INTC) all posted gains of over +3%.
Cryptocurrency Stocks Follow Digital Assets Upward
Crypto stocks traded higher, buoyed by Monday’s gains in digital assets, with Bitcoin (^BTCUSD) rising over +3% and Ethereum (^ETHUSD) gaining +5%. Riot Platforms (RIOT) rallied by more than +7%, MicroStrategy (MSTR) saw a +2.3% increase, and Coinbase (COIN) advanced +2.0%.
Notable M&A Activity and Corporate News
Avidity Biosciences (RNA) rallied significantly, up +42%, after Swiss-based Novartis announced its intention to acquire the company for $12 billion. Novartis ADR shares (NVS) saw a minor decline of -0.9%.
Ohio-based Huntington Bancshares (HBAN) has agreed to acquire Cadence Bank (CADE) for $7.4 billion in an all-stock transaction, aiming to expand its presence into the Southeast and South regions. Huntington’s stock fell -1.8%, while Cadence rallied +4.4%.
American Water Works (AWK) decreased by -2.5%, and Essential Utilities (WTRG) fell -1.4% following news that the two companies finalized AWK’s acquisition of Essential Utilities for $12 billion in an all-stock deal.
Keurig Dr Pepper (KDP) surged over +7% after increasing its full-year net sales guidance.
Lululemon Athletica (LULU) rose approximately +2% on the news of an agreement with the National Football League and sports merchandiser Fanatics Inc to develop a line of fan apparel.
Robinhood Markets (HOOD) climbed more than +4% after CICC initiated coverage with an outperform rating.
Newmont (NEM) fell by more than -5% as the company pursues the acquisition of Barrick’s gold mines in Nevada.
Boeing (BA) rose +0.8%, despite factory workers in St. Louis narrowly rejecting a new 5-year contract that would have ended a 3-month strike impacting the company’s primary military manufacturing operations.
Expert Summary
US stock markets displayed a positive performance on Monday, largely influenced by the promising developments in US-China trade relations. Investors are now closely watching the upcoming FOMC meeting for potential interest rate adjustments and the Q3 earnings season for insights into corporate performance amidst varying economic conditions.