Traders on the floor of the New York Stock Exchange.
Source: The New York Stock Exchange
Futures contracts linked to major US stocks rebounded from their lows in volatile trading on Friday after a key inflation indicator showed tame price pressures and allayed fears of a rapidly rising interest rate.
Dow Jones Industrial Average futures implied an opening drop of 60 points. S&P 500 futures rose 0.3% and Nasdaq 100 futures fell 0.7%. Big tech stocks, which had sold heavily in the previous session, rebounded in premarket trading. Apple, Amazon and Microsoft all gained around 1%, while Facebook and Alphabet were also green.
Futures fell from their lows after the Federal Reserve’s personal consumption expenditure price index tracked subdued inflation in January. The PCE index rose by 0.3% over the course of the month and was thus slightly above the expectation of 0.2%. However, it rose only 1.5% year-on-year and was in line with Dow Jones estimates.
Government bond yields fell after the inflation data was released. The 10-year yield fell about 5 basis points to 1.47% after rising above 1.6% at one point on Thursday. The 10-year yield is up more than 50 basis points since the start of the year, a rapid increase for a bond rate that serves as a benchmark for mortgage rates and auto loans.
Falling interest rates alarmed stock investors, bringing the Nasdaq Composite to its worst session since October the day before. The Dow Jones Industrial Average fell 559 points and pulled back from a record high. The S&P 500 lost 2.5% while the tech-heavy Nasdaq Composite lost 3.5%.
Economists and investment managers say the bond market will respond to positive economic conditions as vaccines roll out and GDP projections improve, which should benefit corporate earnings. The move could also signal inflation faster than expected.
The sheer pace of the surge has also dampened investor appetites for highly valued areas of the market. Higher interest rates reduce the value of future cash flows, so they can compress stock valuations. 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 S&P 500 is down 2% so far this week while the Nasdaq is down 5%. The Dow Industrials is down 0.3%.
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