Markets Are Looking for a Surge in Treasury Yields

U.S. equities pushed to incremental new highs on Tuesday — with all three major averages hitting new territory — as Apple Inc. (NASDAQ:AAPL) unveiled its new full-screen iPhone X with facial recognition unlocking (and a MSRP above $1,000).

In the end, the Dow Jones Industrial Average gained 0.3%, the S&P 500 gained 0.3%, the Nasdaq Composite gained 0.3%, and the Russell 2000 gained 0.6%. Treasury bonds weakened, the dollar was mixed, gold fell 0.2%, and crude oil added 0.3%.

Breadth was positive with advancers outpacing decliners 1.7 to 1 with volume at 102% of the NYSE’s 30-day average. Oddly, defensive telecom stocks led the way (on the backup in yields) with a 1.4% gain likely related to anticipated iPhone upgrade gains. Financials followed with a 1.2% rise. Utilities — the other yield-sensitive group — lagged with a 1.8% decline.

Teva Pharmaceuticals Industries Ltd (ADR) (NYSE:TEVA) gained another 4.5% on the announcement of the $1.1 billion sale of its intrauterine device business. Alcoa Corp. (NYSE:AA) gained 3.2% on an upgrade from Deutsche Bank citing increased aluminum price forecasts.

On the downside, Bunge Ltd (NYSE:BG) fell 5.7% on an M&A announcement. McDonald’s Corproation (NYSE:MCD) fell 3.2% on cautious analyst comments citing estimates of below consensus U.S. comp-store sales. And steelmaker Nucor Corporation (NYSE:NUE) fell 0.9% on an downgrade from Morgan Stanley citing margin concerns.


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AAPL shares dropped 0.4% after unveiling its new iPhone, Apple Watch, and Apple TV lineup today. The iPhone 8/8+ and iPhone X were as expected, with the latter featuring a near-bezelless OLED display and face tracking technology. The Series 3 Apple Watch features a built in cellular card. And the Apple TV will now support 4K output.

Investors seemed a little let down, as a classic “sell the news” dynamic developed. According to UBS, Apple shares have a tendency to decline in the weeks following a new iPhone launch. So, watch for that.

The upgrade cycle should be strong, with a RBC Capital Markets survey showing that many people are using iPhone 6s or older devices. The iPhone 6 cycle was massive, as Apple fans responded to the larger screen format. The iPhone X represents the first form factor change since 2014, so there’ll be some pent-up demand. The new form factor should bolster results in image sensitive China as

The new form factor should bolster results in image sensitive China as well, since it’ll be easy to distinguish the iPhone X from prior models; unlike the lookalike iPhone 7/6s/6.

Conclusion


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Outside of Apple, the other big news of the day (besides JPMorgan Chase & Co. (NYSE:JPM) CEO Jamie Dimon railing against Bitcoin) were the trading revenue takedowns from Wall Street executives. Dimon said JPM trading revenue would be down around 20% and that the bank may no longer give intra-quarter trading guidance in the future. That’s not a good sign.

Later in the day, Bank of America Corp (NYSE:BAC) officials said Q3 trading revenue would be down by 15%. And this follows comments from Citigroup Inc (NYSE:C) that trading revenue would be down 15% year-over-year and 5% sequentially.

The very technical-looking bounce by the Financials SPDR (NYSEARCA:XLF) off of its 200-day moving average to return to its 50-day moving average has been the primary motivator of the broad market’s rise to new records. This is predicated on a pullback in Treasury bonds and thus, a rise in long-term yields.

A surge in yields is needed, and could be signaling a rebound in GDP growth and inflation. But it will weigh on other assets as higher interest rates will have a wet-blanket effect on the rest of the economy.

Also keep in mind that seasonality is very negative in September and that the Dow’s gain to new highs on Monday came on its best one-day in six months. The last two times that happened according to the folks at SentimenTrader: The bull market tops in 2000 and 2007. 

Check out Serge Berger’s Trade of the Day for Sept. 13.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.


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