Day Traders Diary

10/20/22

The major averages closed lower in choppy trading on Thursday as investors weighed several key earnings reports and kept an eye on the bond market, where Treasury yields continue to climb.

The Dow Jones Industrial Average slipped 91 points, or 0.3%. The Nasdaq Composite shed 0.6%, while the S&P 500 dropped 0.8%. The Dow was nearly 400 points at session highs, but stocks faded as Treasury yields rose.

The benchmark 10-year Treasury yield reached a high of 4.239% on Thursday, trading at levels not seen since 2008. Rising rates have been a headwind for stocks all year, as the Federal Reserve continues to try and cool off inflationary pressures not seen in decades.

"As long as official policy is to make the stock market go down, so that people are less wealthy, so that they buy fewer things, so that prices stop going up, all while doing nothing about fiscal policy, we believe the correct posture is to be bearish on stocks and bullish on inflation," Greenlight Capital's David Einhorn said in an investor letter obtained by CNBC.

Stocks have declined for two straight days, but the major averages are still up more than 2% for the week.

Several strong earnings reports limited losses for the market, with AT&T and IBM rising 7.8% and 4.7%, respectively, after beating estimates on the top and bottom lines for their most recent quarter.

On the downside, Tesla shares dropped more than 6% after the electric vehicle maker said Wednesday evening it expects to miss its 2022 deliveries target. The company also posted a quarterly revenue that missed analyst expectations.

The rising Treasury yield environment is one reason that many strategists are skeptical the market can sustain a rally in the near term, even though the third-quarter earnings season has been better than expected so far.

Bond market spooked by market bet that Fed will raise rates to 5% or more

The jump to 5% in May fed funds futures Thursday rattled Treasurys and sent yields higher across the curve. For instance, the 10-year Treasury yield leapt to 4.22% Thursday afternoon, from a low of about 4% Wednesday morning.

Strategists said markets are fearing a more aggressive Fed, and the move in fed funds futures to a 5% terminal rate shook bond investors. The May contract was pricing the terminal rate at 5.01% Thursday afternoon.

The terminal rate is the level where the Fed would stop raising interest rates.

The benchmark 10-year Treasury yield hit 4.22% Thursday after, jumping more than 20 basis points in two sessions.

The yield, which moves opposite price, has been screaming higher on concerns the Federal Reserve will be even more aggressive, and that central banks will stay in tightening mode well into the future.

Gargi Chaudhuri, head of BlackRock's iShares investment strategy in the Americas, said as long as yields continue to move higher stocks will suffer.

Fed funds futures, for the first time Thursday, rose above 5% for next May, signaling traders expect the Federal Reserve to raise its fed funds target rate to that level before stopping. That helped drive Treasury yields higher across the curve.

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