Traders on the trading floor of the New York Stock Exchange.
Source: The New York Stock Exchange
Futures contracts pegged to major US stock indices fell during Thursday night’s overnight session after a rise in interest rates earlier in the day helped push the Nasdaq Composite into its worst session since October.
Dow futures fell 90 points after falling more than 100 points at the start of extended trading. Nasdaq 100 futures fell 0.5%, while S&P 500 futures lost 0.25%.
The moves in extended trading came after a negative regular trading session on Thursday.
The Dow Jones Industrial Average fell 559 points, or 1.8%, falling from a record high. The S&P 500 was down 2.5% on its worst day since January 27, while the tech-heavy Nasdaq Composite lost 3.5% and suffered its biggest one-day sell-off since October 28.
The momentum that took equities to record highs earlier this month met with resistance amid a sudden and pronounced rise in bond yields. Yields on the US 10-year Treasury rose briefly to 1.6% on Thursday, before falling back to around 1.52%, the highest level since February 2020.
The 10-year yield is up more than 50 basis points since the start of the year, a rapid rise for a bond yield used as a measure of mortgage rates and auto loans.
Economists and investment managers say the rise in interest rates is an appropriate bond market response to a positive economy as vaccines are rolled out and GDP forecasts improve, which should boost corporate earnings.
But the tremendous pace of the rise has also dampened investor interest in richly valued parts of the market. Thursday’s jump in the 10-year yield also put it above the S&P 500’s dividend yield, meaning stocks – considered riskier assets – have lost that fixed-payment premium versus bonds.
“Until recently, market participants were able to absorb the upward movement in long-term interest rates, but it looks like the next interest rate hike is a bigger bite to chew,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. said in an email.
“Looking at where real returns were, they were simply too low when we consider growth expectations, and it is likely that real returns will continue to float higher in the long run as economic data improves,” he added.
Popular big tech stocks such as Alphabet, Facebook and Tesla, which all started the year well, fell 3.2%, 3.6% and 8% Thursday. Apple, one of the largest cash-heavy companies in the world, saw its shares fall by more than 15% in the past month.
Instead of technology, where companies borrow more money on average, investors are shifting money to so-called reopening trades, buying shares of companies that would benefit the most from the vaccine rollout, and a return to mainstream travel and dining trends.
This week alone, energy consumption is up 6.8%, by far the biggest winner given the expectation that consumers around the world will soon be driving and flying as they were prior to the Covid-19 pandemic. Industry and financial services are the only other two sectors in green week so far.
Subscribe to CNBC PRO for exclusive insights and analysis, and live programming of working days from around the world.