Another weak handover coming in from Wall Street on Wednesday as the Dow Jones and the S&P 500 fell for the third day in a row as rising treasury yields continued to weigh.
The 30-stock Dow Jones fell over 400 points, marking its worst day since early-September, while the S&P 500 fell 0.9%. The Nasdaq was an underperformer, ending 1.6% lower, courtesy of the fall in big tech shares.
However, that may reverse on Thursday after Tesla’s results, which beat estimates on the profitability front for the first time in five quarters. The stock jumped 12% in extended trading. A $300 billion exchange-traded fund tracking the tech-heavy Nasdaq 100 (QQQ) gained after the close of regular trading.
After last week’s rally to fresh all-time highs, equities have taken a breather, with investors fretting over a number of near-term risks. The next three weeks capture big tech earnings, October’s payrolls report, and the US election, followed by the Fed meeting.
“Despite the possibility of more volatility as we get deeper into earnings season and close in on the November election, the market’s longer-term outlook remains solid,” said Daniel Skelly at Morgan Stanley’s Wealth Management. “And even though this week’s move is a reminder that even the strongest trends have setbacks, so far, this has been a run-of-the-mill pullback for the major indexes.”
Treasury 10-year yields rose three basis points to 4.23%. The dollar rose. The yen hit the lowest in almost three months, reviving concern that Japan may intervene. The loonie slid after the Bank of Canada stepped up the pace of easing.
The price of options that protect against an extended slump in Treasuries has soared to the highest this year amid concerns that losses may deepen.
To Jonathan Krinsky at BTIG, equities are finally noticing the moves in bonds and the dollar. That’s a stark contrast to the action in the last couple of weeks, with the bullish narrative being that bonds were re-pricing to where they should be based on the stronger-than-anticipated economy, he noted.
“While that might be fair in the big picture, markets are always concerned with the velocity of the move rather than the overall level, and the fact that stocks didn’t flinch in the face of those moves suggested complacency,” Krinsky said. “Whether this is the start of the pre-election jitters or not, we continue to see downside risk for equities broadly over the coming weeks, with an SPX pullback into the 5,500-5,650 zone a decent probability.”
Meantime, swap prices reflect less than a 100% certainty that the central bank reduces rates at each of its two remaining policy meetings this year. The bond market is also trimming bets on the degree of Fed rate reductions over the next year.
“We would caution investors from reading too much into the recent rise in bond yields,” said Tiffany Wilding at Pacific Investment Management Co. “Over the past six major Fed rate-cutting cycles, the change in the 10-year Treasury yield a month after the first cut has not provided a consistent signal about the magnitude of further cuts or whether the US economy falls into recession.”
International Business Machines Corp. declined as its revenue underwhelmed. T-Mobile US Inc. raised its forecast for subscribers after a strong quarter.
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