Dow drops about 400 points as rising bond yields lead to stock sell-off

US stock benchmarks fell sharply on Tuesday morning as government bond yields rose further, putting pressure on the technology sector and growth-oriented stocks.

How do the shares trade?
  • The Dow Jones Industrial Average DJIA,
    -1.44%
    fell 402 points, or 1.2%, to 34,469.

  • The S&P 500 SPX,
    -1.95%
    fell 72 points, or 1.6%, to 4,370.

  • The Nasdaq Composite COMP,
    -2.70%
    fell 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 fell 0.3% and the tech-heavy Nasdaq Composite fell 0.5%.

What is the floating market?

Investors have been avoiding government bonds since last week’s Federal Open Market Committee meeting as traders pushed forward expectations for the first rate hike in late 2022. Markets also give about a 50% chance that the European Central Bank will join the Fed with a rate hike next year.

The yield on 10-year Treasury bonds TMUBMUSD10Y,
1,519%
rose 6.2 basis points to 1.541% early Tuesday, reaching the highest level since June.

Rising long-term bond yields have put pressure on technology and other growth-related stocks, while stocks of companies more sensitive to the economy also succumbed to selling pressures, but outperformed more price-sensitive stocks.

“Basically, the equity market has been driven by the bond market this week and if we see bonds continue to fall (yields rise higher), it will result in further underperformance of growth stocks and drag the broader market down, while yields stabilize. would likely enable a revival,” Tom Essaye, founder and president of Sevens Report Research, said in a note dated Tuesday.

Speculation about rising interest rates next year is helping the US dollar gain ground as the dollar index DXY,
+0.34%
is now just 1% below the 52-week intraday high.

Fed Chair Jerome Powell spoke to US Treasury Secretary Janet Yellen before the Senate Banking Committee on Tuesday about the government’s response to the coronavirus pandemic, and will speak at an ECB event on Wednesday.

Powell said a number of supply bottlenecks underlying an inflation spike have worsened.

“Powell should now make some very strong arguments to stem the current rise in interest rates,” said Mark Grant, chief global strategist at B. Riley Financial. “The Treasury 10-year-old has now broken through his technical resistance and it could become problematic.”

Grant said investors should sell bonds and use yield-paying exchange-traded and closed-end funds as income substitutes.

Yellen, meanwhile, warned that the Treasury Department is likely to use extraordinary measures to prevent its debt default if Congress does not act to raise or suspend the debt limit by Oct. 18.

Read: What happens if the US defaults on its debt?

Energy markets are another concern as Europe and Asia compete for the supply of natural gas. The leading natural gas contract NG00,
+3.35%
has increased by 138% this year.

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

Data from Tuesday showed the US trade deficit in goods rose 0.9% to $87.6 billion in August.

The S&P Case-Shiller house price index in 20 cities rose 19.9% ​​in the year to July.

Which companies take center stage?
  • Shares of Ford Motor Co.
    F,
    +1.33%
    were up 2% after the automaker announced plans to spend $11.4 billion building “mega campuses” in Tennessee and Kentucky to help deliver new electric vehicle production capacity.

  • Thor Industries Inc.
    NS,
    +8.48%
    beat Wall Street’s expectations for its fiscal fourth quarter earnings, with sales increasing year on year as demand for recreational vehicles remained strong. The share rose more than 9%.

  • Shares of Aurora Cannabis Inc.
    ACB,
    +6.36%
    shook off premarket losses and rose 5.6% after the Canadian company said late Monday that sales continued to fall as losses mounted in the final three months of the fiscal year.

  • The Wall Street Journal reported that: Merck & Co. Inc.
    MRK,
    +0.05%
    was in talks to take over Acceleron Pharma Inc.
    XLRN,
    +2.36%,
    with a market value of approximately $11 billion. The report said a deal could be announced this week if talks don’t fall apart. Acceleron shares rose 2.3%, while Merck shares fell 0.5%.

How are other assets traded?
  • The ICE US Dollar Index DXY,
    +0.34%,
    a measure of the currency against a basket of six major rivals, rose 0.3%.

  • Oil futures retreated from a previous jump, with the US benchmark CL00,
    -0.85%
    from 0.3% at $75.24 a barrel. gold futures GC00,
    -0.78%
    fell 0.8% to $1,736.90 an ounce.

  • In European equities, the Stoxx Europe 600 SXXP,
    -2.18%
    fell 1.9%, while London’s FTSE 100 UKX,
    -0.50%
    loss 0.3%.

  • In Asia, the Shanghai Composite SHCOMP,
    +0.54%
    rose 0.5%, while the Hang Seng Index HSI,
    +1.20%
    rose 1.2% in Hong Kong. Japanese Nikkei 225 NIK,
    -0.19%
    0.2% down.

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