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Dow skids around 400 points lower as rising bond yields spark equity selloff

U.S. equity benchmarks fell sharply Tuesday morning, as Treasury yields extended their climb, putting pressure on the tech sector and growth-oriented shares.

How are stocks trading?
  • The Dow Jones Industrial Average
    DJIA
    fell 402 points, or 1.2%, to 34,469.

  • The S&P 500
    SPX
    was down 72 points, or 1.6%, at 4,370.

  • The Nasdaq Composite
    COMP
    dropped 348 points, or 2.3%, to 14,622.

On Monday, the Dow Jones Industrial Average rose 71 points, or 0.2%, while the S&P 500 declined 0.3% and the tech-heavy Nasdaq Composite dropped 0.5%.

What’s the driving market?

Investors have been shunning government bonds since last week’s Federal Open Market Committee meeting, as traders brought forward expectations for the first interest-rate increase into late 2022. Markets are also giving roughly 50% odds the European Central Bank will join the Fed with a rate increase next year.

The 10-year Treasury yield
BX:TMUBMUSD10Y
was up 6.2 basis points at 1.541% early Tuesday, hitting its highest level since June.

Rising long-term bond yields have put pressure on tech- and other growth-related shares, while stocks for companies more sensitive to the economic cycle were also succumbing to selling pressure, but outperformed more rate-sensitive stocks.

“Bottom line, the stock market is being driven by the bond market this week and if we see bonds continue to drop (yields spike higher) then that will result in further underperformance by growth stocks and drag the broader market lower while stabilization in yields would likely allow for a rebound,” said Tom Essaye, founder and president of Sevens Report Research, in a Tuesday note.

The speculation about rising interest rates next year is helping the U.S. dollar gain ground, as the dollar index
DXY
is now just 1% below its 52-week intraday high.

Fed Chair Jerome Powell was speaking on Tuesday in front of the Senate Banking Committee with U.S. Treasury Secretary Janet Yellen on the government’s response to the coronavirus pandemic, and is due on Wednesday to speak at an ECB event.

Powell said some of the supply bottlenecks at the heart of a spike in inflation have worsened.

“Powell would have to make some very strong arguments now to stop the current rise in yields,” said Mark Grant, chief global strategist at B. Riley Financial. “The 10 year Treasury has now broken through its technical resistance and things could get problematical.”

Grant said investors should be selling bonds, and using yield-paying exchange-traded and closed-end funds as income substitutes.

Yellen, meanwhile, warned that the Treasury Department is likely to exhaust extraordinary measures to keep from defaulting on its debt if Congress hasn’t acted to raise or suspend the debt limit by Oct. 18.

Read: What happens if the U.S. defaults on its debt?

Energy markets are another source of concern, as Europe and Asia fight for natural-gas supplies. The lead natural-gas contract
NG00
has surged 138% this year.

The Conference Board said its index of consumer confidence slid to a seven-month low of 109.3 this month from a revised 115.2 in August.

Data on Tuesday showed the U.S. trade deficit in goods rose 0.9% in August to $87.6 billion.

The S&P Case-Shiller 20-city home-price index rose 19.9% in the year to July.

Which companies are in focus?
  • Shares of Ford Motor Co.
    F
    were up 2% after the auto maker announced plans to spend $11.4 billion to build “mega-campuses” in Tennessee and Kentucky, to help supply new manufacturing capacity for electric vehicles.

  • Thor Industries Inc.
    THO
    topped Wall Street expectations for its fiscal fourth-quarter profit, showing a year-over-year sales gain as demand for recreational vehicles remained strong. Shares rose more than 9%.

  • Shares of Aurora Cannabis Inc.
    ACB
    shook off premarket losses, rising 5.6% after the Canadian company late Monday said sales continued to decline while losses mounted in the final three months of its fiscal year.

  • The Wall Street Journal reported that Merck & Co. Inc.
    MRK
    was in talks to acquire Acceleron Pharma Inc.
    XLRN,
    which has a market value of around $11 billion. The report said a deal could be announced this week if the talks don’t fall apart. Acceleron shares were up 2.3%, while Merck shares were down 0.5%.

How are other assets trading?
  • The ICE U.S. Dollar Index
    DXY,
    a measure of the currency against a basket of six major rivals, was up 0.3%.

  • Oil futures pulled back from an earlier jump, with the U.S. benchmark
    CL00
    off 0.3% at $75.24 a barrel. Gold futures
    GC00
    were down 0.8% at $1,736.90 an ounce.

  • In European equities, the Stoxx Europe 600
    XX:SXXP
    fell 1.9%, while London’s FTSE 100
    UK:UKX
    shed 0.3%.

  • In Asia, the Shanghai Composite
    CN:SHCOMP
    rose 0.5%, while the Hang Seng Index
    HK:HSI
    rose 1.2% in Hong Kong. Japan’s Nikkei 225
    JP:NIK
    fell 0.2%.

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