Stocks Caught Between A Resilient Economy, Big Tech Woes And Rising Bond Yields

The first week of September was a turbulent time for U.S. stocks. They shook off good economic news to end the week with losses, as big technology companies came under a double attack from the EU and China, and bond yields continued to head north.

The S&P 500 ended the week at 4,457, down from 4,515 the previous week, the Dow Jones at 34,576, down from 34,837, and the tech-heavy Nasdaq at 13,761, down from 14,031.

Equities came under pressure from a sell-off in big tech companies like Apple, Qualcomm and Nvidia, which weigh heavily on major equity indexes.

Tech giants came under a double attack by both European and Chinese regulators.

Early in the week, EU regulators released the Digital Markets Act, intending to limit the power of “gatekeepers” of the digital services market, like Apple, Alphabet and Microsoft.

For instance, the new legislation eases the entry of new competitors in the highly profitable digital market segments closely controlled by Apple Wallet and Google Pay.

Later in the week, China upped the stakes in the ongoing tech war between the world’s two largest economies by banning government officials’ use of iPhones at work. China is still a large market for Apple, with investors concerned as the company plans to launch iPhone 15.

“The top of the market took a hit when reports came out of China about an extended ban on iPhones to government workers, knocking Apple shares down ~6%,” Bryan Novak, managing director at Astor Investment Management, told International Business Times.

“This will be something to keep an eye on for adverse impacts to the supply chain and possibly follow curbs by the Chinese government,” he added.

Equities didn’t get any help from Treasury bonds either. The 10-year bond yield rose slightly from 4.17% at the beginning of the week to 4.26%. It’s a continuation of an uptrend in long-term interest rates, which have almost doubled from a year ago.

Thanks to new data confirming the resilience of the U.S. economy, like stronger-than-expected ISM Services. They tapped trader enthusiasm that the Fed may be ready to pivot on a cooling of the labor market data released last week.

“While there appears to be a majority of market participants that believe we are at or near the end of the Fed hiking cycle, data along these lines does nothing to support the case for the Fed to lower rates based on a moderating labor market,” said Novak.

In addition, the Treasury and the equity markets are on the edge from a renewed rally in oil prices. “Despite Hurricane Idalia causing only ‘minimal damage’ to the energy infrastructure, the U.S. Oil ETF surged by 6.3%,” Javier Palomarez, founder & CEO of the United States Hispanic Business Council, told IBT. “The price per barrel of crude oil spiked by 5% within a week (from August 30th to September 8th). It is imperative to monitor this trend and any factors impacting energy production, as rising energy prices effectively constitute an invisible tax on crucial industries.”

Meanwhile, rising oil prices could fuel renewed inflation pressures, something traders will follow closely this week when the government releases two gauges of inflation, the August Consumer Price Index (CPI) and Producer Price Index (CPI).

Rod Skyles, blogger with The Unconventional Economist, sees stocks trade sideways in the short-term, caught in the crosscurrents of two opposite trends. On the one hand, high valuations and troubles in the commercial real estate and bond markets may eventually spill over into stocks. On the other side is a resilient economy, which could help earnings and valuations.

“Government, corporate and consumer debt are at all-time highs just when interest rates have shot up for the first time in over a decade,” Skyles said. “While those are all bad news for traders, the economy has remained resilient, unemployment is at a multi-decade low, and corporate earnings remain strong. Unless there is a real catalyst one direction or the other, stocks may continue to trade in short up and down cycles as they have the last several months.”