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The Treasury Market Is Sending Warning Flags

Anthony Mirhaydari

U.S. equities started November on a cautious note, with an uneven rise led by large-cap issues. The release of the Republican tax plan was delayed until Thursday. The Federal Reserve left interest rates unchanged, as expected, with odds of a December hike all but assured. And President Trump has reportedly picked Fed governor Jay Powell to get the Fed chairmanship nomination tomorrow, a status quo choice.

The result was a collective shrug on Wall Street. In the end, the Dow Jones Industrial Average gained 0.3%, the S&P 500 added 0.2%, the Nasdaq Composite gave back 0.2% and the Russell 2000 lost 0.7%. Treasury bonds were mixed, the dollar strengthened, gold gained 0.5% and crude oil lost 0.1% after hitting its best level since February.


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Breadth was mixed and volume heavy again, with NYSE activity at 113% of its 30-day average. Energy led the way with a 1.1% gain while utilities were the laggard, down 0.6%. B&G Foods, Inc. (NYSE:BGS) gained 12.7% on strength in frozen Green Giant vegetables — which pretty much summarizes the day.

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On the downside, 3D Systems Corporation (NYSE:DDD) lost 23.7% after missing third-quarter expectations on weaker revenues and margins and higher expected legal costs. Electronic Arts, Inc. (NASDAQ:EA) fell 4.3% despite a quarterly earnings beat as digital revenue growth fell short of estimates.

The Fed, in its policy statement, slightly upgraded its economic outlook with growth “rising at a solid rate” despite hurricane-related disruptions; compared to the activity was “rising moderately” assessment at its last meeting.

On tax reform, Republicans continue to scramble to iron out policy differences on issues like deduction of state and local taxes, a possible phase-in of corporate tax cuts, and possible limits to 401(k)s.

After the close, Tesla Inc (NASDAQ:TSLA) fell 4.3% — adding to the 3.2% loss in the cash session — after reporting a larger-than-expected quarterly loss of $2.92 per share (vs. the $2.45 loss expected). The cash burn rate increased (to $300 million in the quarter vs. $200 million previously) and gross margins tightened (to 18.7% from 25% last year and last quarter).


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The Elon Musk realty distortion field is doing its best to stay in effect, however, with the “Tesla Semi” set for unveiling on November 16. If the after-hours decline holds, it will represent the first break of the 200-day moving average since the beginning of the year.

Facebook Inc (NASDAQ:FB) shares were largely unchanged after reporting better-than-expected earnings and revenues on a 16% increase in daily active users.

Conclusion

While stocks are in their own world, without a care apparently, the U.S. Treasury market is sending a negative signal as medium-term yields continue to rise and long-term yields stagnate.

That’s pushed the yield curve down to levels not seen in 10 years, a sign that bond traders believe trouble lies ahead for the economy and the markets.

Check out Serge Berger’s Trade of the Day for Nov. 2.

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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