Wall Street closed higher on Wednesday buoyed by strong performance of financials and energy stocks. Yields on benchmark 10-Year and 30-Year Treasury Notes hit multi-year highs, driven by a series of strong economic reports released recently. Moreover, crude oil prices reached 4-year highs, boosting the energy sector. All three major stock indexes ended in the green.

The Dow Jones Industrial Average (DJI) closed at 26,828.39, advancing 0.2%. The S&P 500 Index (INX) gained 0.1% to close at 2,925.51. The Nasdaq Composite Index (IXIC) closed at 8,025.08, declining 0.3%. Decliners outnumbered advancers on the NYSE by 1.04-to-1 ratio. On the Nasdaq, advancers had an edge over decliners by 1.63-to-1 ratio.  The CBOE VIX decreased 3.7% to close at 11.61.

How Did the Benchmarks Perform?

The Dow ended in positive territory for the fifth straight day. During the day’s trading, the blue-chip index hits an all-time high of 26,951.81. Meanwhile, 15 components of the 30-stock index finished in the green while the remaining 15 ended in the red. The tech-laden Nasdaq Composite finished in the green reversing its two-day losing streak due to strong showing by large-cap tech stocks.

The S&P 500’s gain was led by an increase of 9% in the Financials Select Sector SPDR (XLF) and 8% gain in Energy Select Sector SPDR (XLE). However, rate-sensitive sectors like Utilities Select Sector SPDR (XLF), Real Estate Select Sector SPDR (XLRE) and Consumer Staples Select Sector SPDR (XLP) lost 1.2%, 1.2% and 1.1%, respectively.

Spike in Government Bond Yield Lifted Financial Sector

On Oct 3, the yield on benchmark U.S. 10-year Treasury Note gained 11 basis points to touch 3.166%, its highest since July 2011. The 30-year Treasury Note’s yield also advanced 12 basis point at 3.327%, marking its highest since October 2014. These increases represent the largest single-day rise in yields since the day after President Donald Trump’s election in November 2016. Moreover, yield on 2-year Treasury Note reached 2.864%, its highest since June 2008.

Recently released economic reports have indicated robustness of the economic fundamentals. Data on manufacturing, services, industrial production, capacity utilization, U.S. consumer sentiment and confidence index, strong government and private sector recruitment have restored investors’ faith in riskier assets like equities reducing the popularity of bonds.

Higher interest rate bodes well for financial sector profits, especially banks. Consequently, banking behemoths like Morgan Stanley MS, JPMorgan Chase & Co. JPM, and Citigroup Inc. C gained 1%, 0.9% and 0.8%, respectively. All three stocks carry a Zacks Rank #3 (Hold). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Rising Crude Oil Prices Boost Energy Sector

Crude oil prices are increasing gradually due to projected fall in supplies from Iran as U.S. sanctions loom large. In May, the United States walked out of the Iran nuclear pact formed in 2015. Further, the Trump administration has threatened all countries with sanctions if they don’t stop importing oil from Iran by Nov 4.

On Oct 3, the U.S. West Texas Intermediate (“WTI”) crude futures gained $1.18 or 1.6% to settle at $76.41 a barrel on the New York Mercantile Exchange. Likewise, international benchmark Brent crude futures rose 1.8% or $1.49 to $86.29 per barrel on London’s ICE exchange. Both closes were the highest since late 2014.

Notably, hike in crude oil prices took place despite the fact that the U.S. Energy Information Administration (EIA) reported on Oct 3, that U.S. crude supplies surged by 8 million barrels for the week ended Sep. 28, marking its highest weekly gain year to date. The crude oil buildup was attributed to a 917,000 bpd (barrel per day) decrease in exports along with a 163,000 bpd increase in imports.

Eco-Political Crisis of Italy Eases

Recent stand-off between the government of Italy and the European Union (EU) has shown some signs of easing. The EU has agreed to Italy’s demand to set its budget deficit target to 2.4% GDP in 2019. In return, Italy will lower this figure to 2.2% in 2020 and 2% in 2021. Notably, Italy has a debt-to-GDP ratio of more than 132%.

Economic Data

On Oct 3, the Institute for Supply Management (ISM) reported that its services (non-manufacturing) index rose to an all-time high of 61.6 in September. The reading was also above the consensus estimate of 57.8. Since services constitute major part of the U.S. economy, market participants expect U.S. GDP to rise in the third and fourth quarter.

Automatic Data Processing Inc. ADP and Moody’s Analytics reported that the U.S. private sector added 230,000 jobs in September. This confirms firmness of the U.S. job market.

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