- US Treasury refunding of $112 billion sent yields lower.
- Federal Reserve keeps rates unchanged at FOMC meeting.
- Dow Jones Industrial Average has gained about 2% this week after crashing over the past two weeks.
- Amgen, Caterpillar already posted results this week, while Apple arrives on Thursday.
The Dow Jones Industrial Average (DJIA) has crested above a 0.7% gain in the last hour of Wednesday’s session following the Federal Reserve’s (Fed) decision to keep the fed funds rate unchanged in a range between 5.25% to 5.5%. The tone of the central bank’s FOMC statement was moderate, but the Fed did say, “inflation remains elevated.” The statement also said the bank would continue its policy of selling Treasuries, which should send yields higher and thus hurt equity prices over the near term.
That part of the statement did not hurt the equity market, however, and the S&P 500 and NASDAQ Composite have both charges above 1% gains in the session.
The DJIA dealt with the collapse of both Caterpillar (CAT) and Amgen (AMGN) stocks on Tuesday and still managed to close up 0.38%. The index now looks ahead to Apple (AAPL) earnings on Thursday, which will directly determine which direction the index breaks.
Dow Jones News: Treasury refunding sends yields lower, stocks higher
The US Treasury announced on Wednesday that it will issue $112 billion in new bonds and bills to repay $102.2 billion in debt due on November 15. The new issuance will result in $9.8 billion in funding for the US government.
Yields on the 2, 5, 10 and 30-year bonds all dropped more than 1% on the news. The market consensus called for $114 billion in this refunding round.
As is common, US equities are moving broadly higher on the reduction in Treasury yields. US Treasury yields are used as discount rates for equities, so as they drop stocks typically rise.
The Treasury will auction 3, 10 and 30-year bonds next week, and Secretary of the Treasury Janet Yellen says that coupons will likely rise for one more quarter.
Apple earnings in view as Amgen, Caterpillar disappoint
The Dow Jones index only has 30 stocks, so every earnings call from a component usually has an outsized effect. Dow members Caterpillar and Amgen both released quarterly results on Tuesday that failed to entice the market.
Amgen (5.1% of the Dow index) beat earnings consensus for the third quarter by $0.28 with $4.96 in adjusted earnings per share (EPS). Revenue was the sore spot, however, as it rose 4% YoY but misses consensus by $50 million. For the full year, Amgen said it will earn between $18.20 and $18.80 in adjusted EPS.
With adjusted EPS of $5.52 on $16.8 billion in sales for the third quarter, Caterpillar (4.5% of the Dow index) would have been predicted to see a climbing share price. The heavy equipment manufacturer beat on top and bottom lines, but the market flagged it for uncertain future growth prospects. Most of its 12% YoY increase in sales stemmed from higher prices rather than volumes.
Apple is the major player providing an earnings update this week though. Wall Street expects $1.39 in EPS on $89.42 billion in sales for its fiscal fourth quarter. CEO Tim Cook’s electronics megalith is widely expected to beat consensus, but recent news suggests that demand may be waning for its iPhone 15.
Since Apple makes up just 3.4% of the index, the direct effect of earnings may be lower than expected. However, the entire equity market is likely to move alongside Apple since it is the largest US stock by market cap at $2.67 trillion.
Don’t count Apple out though, says Wedbush’s star analyst Dan Ives. “The overall sentiment of Apple on the Street is a negative ‘groupthink mentality,’” a team led by Ives wrote on Wednesday. The Wedbush note said that its research in Asia leads it to believe that Apple is more than capable of beating consensus on Thursday.
Nasdaq FAQs
The Nasdaq is a stock exchange based in the US that started out life as an electronic stock quotation machine. At first, the Nasdaq only provided quotations for over-the-counter (OTC) stocks but later it became an exchange too. By 1991, the Nasdaq had grown to account for 46% of the entire US securities’ market. In 1998, it became the first stock exchange in the US to provide online trading. The Nasdaq also produces several indices, the most comprehensive of which is the Nasdaq Composite representing all 2,500-plus stocks on the Nasdaq, and the Nasdaq 100.
The Nasdaq 100 is a large-cap index made up of 100 non-financial companies from the Nasdaq stock exchange. Although it only includes a fraction of the thousands of stocks in the Nasdaq, it accounts for over 90% of the movement. The influence of each company on the index is market-cap weighted. The Nasdaq 100 includes companies with a significant focus on technology although it also encompasses companies from other industries and from outside the US. The average annual return of the Nasdaq 100 has been 17.23% since 1986.
There are a number of ways to trade the Nasdaq 100. Most retail brokers and spread betting platforms offer bets using Contracts for Difference (CFD). For longer-term investors, Exchange-Traded Funds (ETFs) trade like shares that mimic the movement of the index without the investor needing to buy all 100 constituent companies. An example ETF is the Invesco QQQ Trust (QQQ). Nasdaq 100 futures contracts allow traders to speculate on the future direction of the index. Options provide the right, but not the obligation, to buy or sell the Nasdaq 100 at a specific price (strike price) in the future.
Many different factors drive the Nasdaq 100 but mainly it is the aggregate performance of the component companies revealed in their quarterly and annual company earnings reports. US and global macroeconomic data also contributes as it impacts on investor sentiment, which if positive drives gains. The level of interest rates, set by the Federal Reserve (Fed), also influences the Nasdaq 100 as it affects the cost of credit, on which many corporations are heavily reliant. As such the level of inflation can be a major driver too as well as other metrics which impact on the decisions of the Fed.
What they said about the market – Piper Sandler
On Tuesday, Piper Sandler reiterated its call for the S&P 500 to rise some 15% to 4,825 by year-end. The sell-side firm said that about one-quarter of the S&P 500 is at oversold conditions based on the Relative Strength Index (RSI), and the firm does not think this pessimism is likely to hold.
“Given all the doom and gloom in this market lately, we believe this is not the time to stop believin’ in it. Instead, we expect more than just a relief rally to unfold from these extreme oversold breadth conditions, creating a meaningful ‘Pop phase’ into year-end that will likely surprise most investors.”
Dow Jones Industrial Average forecast
The Dow Jones Industrial Average has bounced off of its Friday low of 32,327 this week. Close above the 9-day Simple Moving Average on Tuesday, the DJIA has risen within striking distance of the 21-day SMA. A break higher than the 21-day SMA will confirm to many traders that a short-term rally is beginning at the very least.
Any close above 34,000 will tell the market that the three-month famine is over. In the mean time, the 32,500 to 33,000 demand zone should support the index while bulls pine for the 34,300 to 34,700 long-term resistance band.
Dow Jones Industrial Average daily chart
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