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Earnings and Europe Could Steer Markets as Low Yields Flash Warning for Stocks

Corporate earnings reports will compete for attention with whatever Europe throws at markets Tuesday.

Apple
Kimihiro Hoshino | AFP | Getty Images
Apple

Europe had the upper hand Monday, as fears about a bigger Spanish bailout fed worries that maybe Italy could also need help. Greece stayed in the headlines ahead of Tuesday’s meeting between Greek officials and the “troika” of EU, IMF, and European Central Bank officials.

After the closing bell, Moody’s lowered the outlook on Germany’s triple A rating to negative from stable, due to increased uncertainties and a greater chance Greece could leave the euro zone.

Stocks and commodities fell Monday, and U.S. Treasury yields fell to all-time lows. The dollar gained against the euro, while Spanish bond yields snapped higher. Spain’s 10-year was as high as 7.5 percent.

The U.S. 10-year yield fell to 1.398 percent, below 1.40 for the first time, and the 30-year fell below 2.8 percent. The market later reversed, and the 10-year went back to the 1.43 area.

“I think the biggest driver is economic expectations coming down,” said Ajay Rajadhyaksha, head of Rates and Securitized Products at Barclays. Rajadhyaksha said even without Europe, U.S. rates would continue to stay low because of the weakening economy and the Fed’s low interest rate policies.

Gina Martin Adams, Wells Fargo Securities institutional equities strategist, said she is watching the drop in Treasury yields. While the Fed’s Treasury purchases and rate policies have changed the dynamic of the bond market, she said the falling yields are still a warning sign for stocks, and they are confirming some of the other negative signs, such as weaker small caps and declining transports.

“1.44 percent on the 10-year suggests a very bearish tone. It’s not the only indicator but it’s one of many that suggests the market will continue in a period of volatility and stay pretty weak. It’s tough to get optimistic when the 10-year Treasury note is at 1.44 percent,” she said.

CRT Capital chief Treasury strategist David Ader said that many of the investors that helped drive rates to record lows early Monday morning were foreign buyers. “The next big move is lower, not higher,” he said. He said he expects the 10-year yield to touch 1.15 percent this year.

“There’s supply this week and very limited data,” he said. The Treasury auctions $35 billion 2-year notes at 1 p.m. Tuesday. There is Markit’s flash PMI data at 9 a.m., and FHFA home price data at 10 a.m.

In Europe, there are also PMI readings, and Spain auctions two to three billion euros in short term bills. China also was expected to have PMI data overnight.

The Dow erased its steepest losses, closing off 101 points Monday at 12,721, while the S&P 500 ended the day down 12 at 1350, and the Nasdaq ended down 35 points at 2890.

The global sell off also took commodities with it. Oil plunged 4 percent on the Nymex, ending the day at $88.24. Grains also fell, in part due to reports about rainfall in the Midwest. A government weekly report on crop conditions showed further deterioration of the corn crop, with an estimated 50 percent in poor or worse shape.

“I think the (stock) market is in a pretty weak condition considering the amount of negative revisions and negative forward guidance from companies,” said Adams.

“On top of that you have the multiple, and what are investors willing to pay?” she said. Adams said the Fed has proved to be a big driver of multiples over the last few years.

She said stocks could get a boost from another round of Fed easing, if the Fed decides to pursue another round of asset purchases. “The third time around it may provide some boost to the upside, but it could be temporary as the economy continues to weaken and earnings continue to weaken. A lot of the weakness in the market is coming from overseas sources, and that’s difficult for the Fed to impact,” she said.

From tech and telecom to defense contractors and transports, dozens of big companies report earnings Tuesday but the one likely to get the most attention is Apple, which reports after the bell. Apple is expected to earn $10.35 per share on revenues of $37.3 billion, according to FactSet. The stock was flat Monday, ahead of the report.

Other companies reporting early in the day include AT&T, DuPont, Biogen Idec, Lockheed Martin, Peabody Energy, UPS, SAP, Air Products, Rockwell Collins, Illinois Toolworks, Domino’s Pizza, EMC, Simon Property Group, UnderArmour, Ryder System and AK Steel. After the bell reports are expected from Norfolk Southern, Annie’s, Altera, Aflac, Cabot Oil, Netflix, Nabors, Range Resources, Buffalo Wild Wings and Panera.

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Price
 
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ALS30
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T
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DD
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DTST
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LMT
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BTU
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UPS
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SAP
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COL
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ITW
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DPZ
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EMC
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SPG
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UA
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R
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NSC
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3776.T
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FORW RE LS
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COG
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NFLX
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NBR
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RRC
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PNRA
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Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.