Traders on the floor of the New York Stock Exchange.
Source: The New York Stock Exchange
Futures contracts tied to the major U.S. stock fluctuated on Friday as popping interest rates alarmed equity investors and pushed the Nasdaq Composite to its worst session since October a day earlier.
Dow Jones Industrial Average futures implied an opening drop of 60 points. S&P 500 futures inched higher after losing 0.4% and Nasdaq 100 futures fell 0.1%. Contracts tied to all three indexes overnight appeared to rise and fall in tandem with the movements of the 10-year Treasury note yield.
The moves in equity futures came after a negative regular trading session on Thursday.
The Dow Jones Industrial Average dropped 559 points, or 1.8%, pulling back from a record high. The S&P 500 lost 2.5% to clinch its worst day since Jan. 27 while the tech-heavy Nasdaq Composite shed 3.5% and suffered its biggest one-day sell-off since Oct. 28.
The momentum that carried stocks to all-time highs earlier this month has met resistance amid a sudden and pronounced rise in bond yields. The rate on the U.S. 10-year Treasury note briefly soared as high as 1.6% on Thursday before simmering back down to around 1.52%, its highest level since February 2020.
The 10-year yield, last seen around 1.48%, is up more than 50 basis points since the year began, a rapid rise for a bond rate used as a benchmark for mortgage rates and auto loans.
Economists and investment managers say the bond market is reacting to positive economics as vaccines are rolled out and GDP forecasts improve, which should benefit corporate profits. But the move could also signal faster-than-expected inflation ahead.
The sheer pace of the rise has also had the effect of dampening investors’ appetite for richly valued areas of the market. Higher rates reduce the value of future cash flows so they can have the effect have compressing equity valuations. Thursday’s jump in the 10-year yield also put it above the S&P 500′s dividend yield, meaning that equities — which are considered riskier assets — have lost that fixed-payment premium over bonds.
“Until recently, market participants have been able to digest the upward drift in long-term rates, but it appears that the next leg up in interest rates is a bigger bite to chew,” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in an email.
“Looking at where real yields were at, they were simply too low when considering growth expectations, and it’s likely that long-term real yields will continue to drift higher as economic data improves,” he added.
Popular big-tech stocks like Alphabet, Facebook and Tesla, all of which began the year on strong footing, dropped 3.2%, 3.6% and 8% on Thursday. Apple, one of the largest, cash-heavy companies in the world, has seen its stock slide more than 15% over the last month.
Tesla was down another 3% in premarket trading Friday. Apple and Facebook were also lower in early trading.
Instead of tech, where companies tend to borrow more on average, investors are shifting money into so-called reopening trades, buying the stock of companies that would benefit most from the vaccine rollout and a return to regular travel and dining trends.
Energy has gained 6.8% this week alone, the biggest winner by far amid expectations that consumers around the world will soon be driving and flying as they were prior to the Covid-19 pandemic. Industrials and financials are the only two other sectors in the green week to date.
The S&P 500 is down 2% so far this week, while the Nasdaq has lost 5%. The Dow Industrials is own 0.3%.
Democrats suffered a setback Thursday evening in their plans to pass President Joe Biden’s $1.9 trillion stimulus package. Senate parliamentarian Elizabeth MacDonough determined lawmakers could not include a $15 minimum wage hike, a major component of the plan, in a bill passed via budget reconciliation.
Reconciliation allows a party to pass their legislation with a simple majority vote but restricts the types of provisions that can be included based on how much they would impact the federal deficit.
Democrats are expected to pursue a minimum wage hike in future legislation and are still likely to try to pass some version of the original $1.9 trillion plan.
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