Traders on the floor of the New York Stock Exchange.
Source: The New York Stock Exchange
Futures contracts linked to major US stocks were volatile early Friday morning after a rise in interest rates the day before helped bring the Nasdaq Composite to its worst session since October.
Dow Jones Industrial Average futures implied an opening decline of more than 100 points. S&P 500 futures and Nasdaq 100 futures both traded lower. Contracts pegged to all three indices appeared to rise and fall in line with movements in the 10-year Treasury note yield.
The movements in stock futures came after a negative regular trading session on Thursday.
The Dow Jones Industrial Average fell 559 points, or 1.8%, and pulled back from a record high. The S&P 500 lost 2.5% to hit its worst day since January 27, while the tech-heavy Nasdaq Composite lost 3.5% to see its biggest one-day sell-off since October 28.
The momentum that pushed stocks to all-time highs earlier this month met resistance in the face of a sudden and sharp spike in bond yields. The 10-year US Treasury bill interest rate briefly rose to 1.6% on Thursday before falling back to around 1.52%, its highest level since February 2020.
The 10-year yield, which was last at 1.46%, has risen by more than 50 basis points since the start of the year. This is a rapid rise in a bond rate that serves as a benchmark for mortgage rates and auto loans.
Economists and investment managers say the rate hike is an appropriate bond market response to the positive economy as vaccines roll out and GDP forecasts improve, which should benefit corporate earnings.
But the sheer pace of the surge has also dampened investor appetite for highly valued areas of the market. With Thursday’s 10-year yield spike, it was also above the S&P 500’s dividend yield, meaning stocks – considered riskier assets – have lost that fixed-payment premium over bonds.
“Until recently, market participants could digest the uptrend in long-term interest rates, but it appears that the next hike in interest rates will be a bigger bite,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. said in an email.
“Given where real returns have been, they were just too low given growth expectations, and it is likely that long-term real returns will continue to rise as economic data improves,” he added.
Popular big tech stocks like Alphabet, Facebook and Tesla, all of which started the year strong, fell 3.2%, 3.6% and 8%, respectively, on Thursday. Apple, one of the largest, cash-intensive companies in the world, saw its share price fall more than 15% last month.
Instead of technology, where companies borrow more on average, investors are investing money in so-called reopening businesses and buying stocks of companies that would benefit most from the introduction of the vaccine and a return to regular travel and hospitality trends.
Energy has increased 6.8% this week alone. This is by far the biggest winner as consumers around the world are expected to be driving and flying soon as they did before the Covid-19 pandemic. Industry and finance are the only other sectors in the Green Week so far.
The Democrats suffered a setback on Thursday night in their plans to pass President Joe Biden’s $ 1.9 trillion stimulus package. Senate MP Elizabeth MacDonough noted that lawmakers could not include a $ 15 increase in the minimum wage, an integral part of the plan, in a bill passed through a budget vote.
Reconciliation allows a party to pass its laws by a simple majority, but limits the types of provisions that can be included depending on how much they would affect the federal deficit.
Democrats are expected to seek an increase in the minimum wage in future legislation, and they will likely continue to attempt to pass a version of the original $ 1.9 trillion plan.
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