Friday February 26th


Futures are choppy as stocks try to rebound from sell-off triggered by rising rates

U.S. stock index futures bounced off their lows in volatile trading on Friday after a key inflation gauge showed tame price pressures. Dow Jones Industrial Average futures implied an opening drop of 60 points. S&P 500 futures inched 0.3% higher and Nasdaq 100 futures fell gained 0.7%. Big Tech stocks, which sold off sharply in the previous session, rebounded in premarket trading. Apple, Amazon and Microsoft all gained about 1%, while Facebook and Alphabet also traded in the green. Futures came off their lows after the personal consumption expenditures price index that the Federal Reserve watches indicated subdued inflation in January. The PCE index rose 0.3% for the month, slightly ahead of the 0.2% expectation but was up just 1.5% year over year, matching Dow Jones estimates. Treasury yields fell following the inflation data release. The 10-year yield dipped about 5 basis points to 1.47% after surging above 1.6% at one point on Thursday. The 10-year yield is up more than 50 basis points since the year began, a rapid rise for a bond rate used as a benchmark for mortgage rates and auto loans. Popping interest rates alarmed equity investors and pushed the Nasdaq Composite to its worst session since October a day earlier. The Dow Jones Industrial Average dropped 559 points, pulling back from a record high. The S&P 500 lost 2.5% while the tech-heavy Nasdaq Composite shed 3.5%. Economists and investment managers say the bond market is reacting to positive economics as vaccines are rolled out and GDP forecasts improve, which should benefit corporate profits. But the move could also signal faster-than-expected inflation ahead. The sheer pace of the rise has also had the effect of dampening investors’ appetite for richly valued areas of the market. Higher rates reduce the value of future cash flows so they can have the effect have compressing equity valuations. Thursday’s jump in the 10-year yield also put it above the S&P 500′s dividend yield, meaning that equities — which are considered riskier assets — have lost that fixed-payment premium over bonds. “Until recently, market participants have been able to digest the upward drift in long-term rates, but it appears that the next leg up in interest rates is a bigger bite to chew,” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in an email. “Looking at where real yields were at, they were simply too low when considering growth expectations, and it’s likely that long-term real yields will continue to drift higher as economic data improves,” he added. Popular big-tech stocks like Alphabet, Facebook and Tesla, all of which began the year on strong footing, dropped 3.2%, 3.6% and 8% on Thursday. Apple, one of the largest, cash-heavy companies in the world, has seen its stock slide more than 15% over the last month. Tesla was down another 3% in premarket trading Friday. Apple and Facebook were also lower in early trading. Instead of tech, where companies tend to borrow more on average, investors are shifting money into so-called reopening trades, buying the stock of companies that would benefit most from the vaccine rollout and a return to regular travel and dining trends. Energy has gained 6.8% this week alone, the biggest winner by far amid expectations that consumers around the world will soon be driving and flying as they were prior to the Covid-19 pandemic. Industrials and financials are the only two other sectors in the green week to date. The S&P 500 is down 2% so far this week, while the Nasdaq has lost 5%. The Dow Industrials is down 0.3%. Democrats suffered a setback Thursday evening in their plans to pass President Joe Biden’s $1.9 trillion stimulus package. Senate parliamentarian Elizabeth MacDonough determined lawmakers could not include a $15 minimum wage hike, a major component of the plan, in a bill passed via budget reconciliation. Reconciliation allows a party to pass their legislation with a simple majority vote but restricts the types of provisions that can be included based on how much they would impact the federal deficit. Democrats are expected to pursue a minimum wage hike in future legislation and are still likely to try to pass some version of the original $1.9 trillion plan. Stocks in Asia-Pacific fell sharply on Friday following an overnight drop on Wall Street as a rapid rise in bond yields rattled investor sentiment. In Japan, the Nikkei 225 led losses among the region’s major markets as it fell 3.99% to close at 28,966.01 while the Topix index slipped 3.21% to finish its trading day at 1,864.49. South Korea’s Kospi dropped 2.8% to close at 3,012.95. Hong Kong’s Hang Seng index plunged 3.64% to close at 28,980.21. Mainland Chinese stocks also fell on the day: The Shanghai composite was down 2.12% to 3,509.08 while the Shenzhen component slipped 2.167% to around 14,507.45. Oil prices fell on Friday as a collapse in bond prices led to gains in the U.S. dollar and expectations grew that with oil prices back above pre-pandemic levels, more supply is likely to come back to the market. U.S. West Texas Intermediate (WTI) crude futures dropped $1.32, or 2%, to trade at $62.20 per barrel, giving up all of Thursday’s gains. Brent crude futures for April fell 97 cents, or 1.45%, to $65.91 a barrel, following a 16 cent loss on Thursday. The April contract expires on Friday. The more active May contract fell 32 cents, or 0.5%, to $65.79. Gold slipped on Friday and was headed for its second straight monthly decline, as U.S. Treasury yields held near a more than one-year high, eroding bullion’s safe haven status. Spot gold fell 0.3% to $1,765.06 per ounce. U.S. gold futures dropped 0.7% to $1,762.50.