Changes in Yields Can Affect the Dollar, Bitcoin, Gold, Tech Stocks, and M&A Activity

Bloomberg is reporting that President Joe Biden is set to tap 5 million barrels of the U.S. Strategic Oil Reserves in response to higher oil prices. This would be the biggest draw ever for the United States. The White House hopes to coordinate the release with other releases from India, Japan, and North Korea, although their releases would be much smaller by comparison. China already tapped its oil reserves in September and announced last week that it is looking to tap once again. The goal is to push OPEC to increase output, but OPEC has responded by threatening to produce less oil to offset the reserve releases. The news prompted crude oil (/CL) to trade 1.8% lower before the market open, but the price has backed off of those lows.

Even though the draw would be the biggest ever from the oil reserves, it’s not that much compared to the overall oil market. According to Statista, OPEC produces about 30 million barrels per day. Some critics of the policy want to see the U.S. oil remain in the U.S. by banning exports, while others would like to see President Biden reverse some of the executive orders, he signed in January that greatly reduced access to drilling on federal lands and offshore. These critics say that increased drilling could provide a long-term solution for ongoing oil supply issues.

The rising U.S. Dollar Index ($DXY) should also help reduce oil prices and it got another boost from a bounce in interest rates. The 10-year Treasury Yield (TNX) moved up 5.79%. Rising rates may have been a reaction to President Joe Biden’s renomination of Federal Reserve Chairman Jerome Powell. Some investors were expecting Lael Brainard to be the next nominee, and she is thought of as being more dovish and less likely to raise rates. Ms. Brainard was nominated to be the vice-chair.

The stronger dollar and rising interest rates had effects in other areas too. Bitcoin futures (/BTC) were rallying on the day but gave back its gains and fell 2.92%. Likewise, gold futures (/GC) fell 2.54% on the news and has nearly retraced its rally that started on November 4. However, crude oil futures (/CL) appears to be withstanding the stronger dollar because it was still up on the day. Crude has been pulled back recently and is testing July highs as a potential support level.

Rising interest rates also brought tech stocks lower. The S&P Technology Sector Index ($IXT) rallied 1.6% during the first hour of trading but sold off to close 1.14% in the red. Rising interest rates can hurt technology stocks because the rising rates change the way some investors value stocks within their models. 

The negative mood toward technology stocks appears to have offset positive earnings announcements from tech companies. After the close, Zoom ZM announced better-than-expected earnings and revenue. However, the stock fell 5.48% in after-hours trading, adding to its Monday losses of 3.59%. Zoom is down about 50% from its 52-week high. Additionally, Wells Fargo analysts assumed coverage of the company but only gave it an “equal weight” rating. Agilent A also announced better-than-expected earnings but sold off more than 3% in after-hours trading.

According to The Wall Street Journal, the semiconductor shortage is prompting Samsung to build a $17 billion chip-making factory outside of Austin, Texas. The plant could create 1,800 jobs, but production isn’t expected to start until the end of 2024.

Despite missing on earnings expectations, Chinese EV maker Xpeng XPEV is trading 3.6% higher before the open. The company provided more bullish forward earning guidance once its semiconductors and parts shortages are resolved.

Several retailers also announced earnings. Best Buy BBY is struggling to grow sales according to its latest earnings announcement. While the company beat on earnings and revenue, it offered a softer holiday outlook which prompted a 12% selloff in premarket trading.

Looking at clothing retailers, Urban Outfitters URBN was also down 11% before the bell, and Burlington BURL was down 5.7% despite beating on earnings and revenue estimates. Like Best Buy, both companies offered a muted growth forecast.

Dicks Sporting Goods DKS rose last night in after-hours trading but turned down 1.6% before the market opened. The company reported good earnings and give higher forward guidance. Perhaps its retail peers are acting as a bit of drag on the stock.  

Finally, deep discount retailer Dollar Tree DLTR is also down 1.92% in premarket trading on its earnings and revenue announcements that came in line with analysts’ estimates.  

As investors start focusing on the Thanksgiving holiday, look to see if volume starts to dry up throughout the day. Traders should be cautious of their position sizes as investors may leave early to get a start on celebrating.

Switching to the housing market, after Monday’s open, the National Association of Realtors released the U.S. Existing Home Sales report. The report showed the dollar amount of existing homes that were sold was more than what analysts expected. The median home price increased 13.1% compared to a year ago and was up 0.8% for the month. However, the seasonally adjusted numbers showed prices fell 5.8% from a year ago but rose 1.3% in October.  

Green Steel

U.S. steelmakers rallied on Monday as investors started considering potential winners from the House passing President Biden’s Social Safety Net and Climate bill. Depending on how the bill fares as it goes to the Senate, it could add another $2.2 trillion in spending over the next decade. Nucor NUE rallied more than 6% on the news, along with Steel Dynamics STLD at 6.2%, U.S. Steel X at 4.28%, and Cleveland Cliffs CLF at 2.96%.

According to Investor’s Business Daily, Nucor has an energy-efficient new product called Econiq, which creates steel products at net-zero carbon. The company uses recycled scrap-based electric arc furnace technology to keep greenhouse gasses at 70% of industry norms. Then the company uses carbon offsets from its 100% renewable electricity source and other areas to help counter the remaining emissions.

CHART OF THE DAY: GOOD AS GOLD. The U.S. Dollar Index ($DXY—candlesticks) continues its uptrend as the dollar strengthens against a basket of other currencies. The dollar is also gaining in relative strength against gold (/GC—green). Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Everything That Glitters: As the Fed continues to taper and possibly even accelerate its tapering plans, the U.S. dollar is likely to appreciate. This is because the Fed will have less of an impact on how interest rates play along the yield curve. Interest rates could continue to rise, which will attract more foreign investors looking for higher yields. In order to get the higher yields in the United States, foreign investors will need to exchange their currencies for dollars, which is why higher rates help strengthen the dollar. As the dollar strengthens, gold futures (/GC) normally decrease in price because gold is traded in dollars, and a strong dollar makes gold lose value. This means gold bugs could find their investment a little less shiny.  

M&A Q&A: Swedish telecommunications company Ericsson ERIC announced plans to buy cloud-based telecom company Vonage VG for $21 per share for an enterprise value of $6.2 billion. Vonage rallied 25.8% on Monday in reaction to the news, while Ericsson fell 6.8%. This is another deal in what appears to be a record year for mergers and acquisitions (M&A). According to KPMG, deal-making activities could hit a record $6 trillion by the end of 2021. The previous record was set in 2015 at $4.8 trillion.

Despite recent increases in yields, interest rates are still at historical lows, which is one reason M&A activity is still strong. The low cost of money makes M&A a cheaper and quicker way to expand a business and gain knowledge and technology. However, some investors see M&A as a sign that a company can’t grow on its own and has to rely on alternative strategies. On the other side, M&A activity can also be seen as bullish because it removes a company from the marketplace and therefore tightens the supply of shares available for investment.

EV Goes EB: Electric vehicle (EV) stocks have been very popular, with Tesla TSLA reaching a market cap of over a $1 trillion this year and new arrivals Rivian RIVN and Lucid LCID growing their market caps above General Motors GM and Ford F. Despite their longevity in the automaking business and big investments into EV manufacturing, GM and Ford have struggled to find the same love the other EV makers are getting. GM has created a goal to only manufacture electric cars and trucks by 2035. Now, it’s looking to raise the stakes once again by acquiring a 25% stake in Pure Watercraft, which is a Seattle-based company that creates electric boats. Investors appear to approve of the move because the stock rose 3.66% on Monday.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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