Stocks, Futures Drop Amid Spike in Treasury Yields: Markets Wrap

(Bloomberg) — A technology-led equity selloff deepened, and government bonds from the U.S. to Germany tumbled, as investors braced for imminent Federal Reserve tapering. The dollar gained haven allure amid a supply crunch from oil to semiconductors.

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Contracts on the Nasdaq 100 Index plunged 1.2%, signaling the digital-driven gauge will extend Monday’s losses. The 10-year Treasury yield rose above 1.5% while shorter-dated rates surged toward pre-pandemic levels. Oil headed for multiyear highs. Applied materials Inc. led a slump in chip stocks in New York premarket trading.

Money managers have begun reassessing valuations amid multiplying global risks. Federal Reserve officials have communicated increasingly hawkish signals in recent days as supply-chain bottlenecks threaten to keep inflation elevated. China’s growth slowdown and a debt crisis in the nation’s property market have also fueled the risk-off shift.

“Central bankers have set out how they want to normalize monetary policy for some time,” Chris Iggo, chief investment officer for core investments at AXA Investment Managers, said in a note. “That process could start soon. The realization of this has the potential to provoke some volatility in rates and equities.”

Chair Jerome Powell said Monday the inflation test for scaling back the Fed’s bond-buying has been met, while the employment test “is all but met.” Fed Governor Lael Brainard said the labor market may soon meet her yardstick for scaling back asset purchases, while New York Fed President John Williams noted that moderating bond-buying may soon be warranted.

A gauge of European technology stocks slumped to a six-week low, with investors scaling back exposure to growth stocks amid higher yields. The slide extended to New York’s premarket session, where shares from Applied Materials to Nvidia and AMD dropped at least 2%. The Nasdaq 100 has fallen 3% from a record high, but still trades at 27 times projected earnings, 42% higher than its 10-year median valuation.

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The benchmark 10-year U.S. yield rose five basis points to 1.54%, a three-month high. The five-year rate crossed the 1% mark for the first time since February 2020, while its two-year counterpart was at the highest since March of that year. The U.K.’s 10-year yield crossed 1% for the first time since around the same time.

Brent crude futures jumped to a three-year high on Tuesday, while WTI contracts traded above $76. A flurry of bullish price predictions from banks and traders, gains in natural gas, and speculation the energy industry isn’t investing enough in fossil fuels signaled a global crunch. Goldman Sachs Group Inc. said Brent could hit $90 by year-end as the market was in a bigger deficit than many realized.

The dollar jumped to a five-week high, posting gains against all of its Group-of-10 peers. While concerns around the coronavirus may have eased, uncertainty over global growth and monetary policy have given dollar bulls more ammunition.

Hong Kong equities advanced, defying Asian losses, after China’s central bank said it will work to safeguard the “healthy” development of the property market amid the China Evergrande Group crisis.

The gloomy mood spread to the cryptocurrencies market, with Bitcoin falling for a second day and trading around $42,000 apiece.

Here are some events to watch this week:

• Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen to testify at a Senate Banking Committee hearing Tuesday

• European Central Bank President Christine Lagarde speaks Tuesday at the ECB Forum on Central Banking

• Japan’s ruling party votes to elect leader, Wednesday

• Central bank chiefs Andrew Bailey (BOE), Haruhiko Kuroda (BOJ), Christine Lagarde (ECB) and Jerome Powell (Fed) participate in an ECB Forum panel, Wednesday

• House Financial Services Committee hearing on the Fed, Treasury’s pandemic response, Thursday

• China Caixin manufacturing PMI, non-manufacturing PMI, Thursday

• Univ. of Michigan sentiment, ISM manufacturing, U.S. construction spending, spending/personal income Friday

For more market analysis, read our MLIV blog.

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 1.2% as of 10:25 a.m. London time

• Futures on the S&P 500 fell 0.6%

• Futures on the Nasdaq 100 fell 1.2%

• Futures on the Dow Jones Industrial Average fell 0.3%

• The MSCI Asia Pacific Index fell 0.4%

• The MSCI Emerging Markets Index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro fell 0.1% to $1.1683

• The Japanese yen fell 0.3% to 111.29 per dollar

• The offshore yuan was little changed at 6.4581 per dollar

• The British pound fell 0.2% to $1.3674

Bonds

• The yield on 10-year Treasuries advanced three basis points to 1.52%

• Germany’s 10-year yield advanced three basis points to -0.20%

• Britain’s 10-year yield advanced five basis points to 1.00%

Commodities

• Brent crude rose 0.8% to $80.19 a barrel

• Spot gold fell 0.4% to $1,743.04 an ounce

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