Rising Bond Yields Weigh On Wall Street

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rise in bond yields

On Monday, U.S. stocks were on course to open lower as rising bond yields extended the selloff in equities and warnings of accelerated inflation sparked concerns that the Federal Reserve may raise interest rates faster than expected.

The yield on 10-year U.S. Treasury debt reached a four-year high of 2.885 percent, after Friday’s increase of nearly 7 basis points.  Rising bond yields lead to higher borrowing costs for companies as well as an alternate investment option for traders.

On Friday, all three of Wall Street’s major indexes registered their biggest weekly losses in two years. The S&P 500 and the Dow had their worst week since January 2016 while the Nasdaq had its worst since early February 2016. Friday also marked the largest daily point fall in the Dow since the financial crisis in 2008.

U.S. payrolls report on Friday indicated that wages are growing at their fastest pace in over eight years, adding to the apprehensions that both inflation and interest rates are more likely to increase earlier than imagined.

Three rate hikes are priced in for 2018.  However, if the economy and corporate earnings continue to improve, the probability of a fourth increase is higher.  Jerome Powell will take over for Janet Yellen on Monday as the new Federal Reserve Chair.

The CBOE Volatility Index was trading at its highest since November 2016 at 18.68.


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“The selloff is continuing this morning and futures point to a lower opening as investors track rising yields,” Peter Cardillo, a chief market economist in a client note.  “While we don’t think Friday’s selloff is the beginning of a severe correction, the pressure on stocks will continue with high volatility making the mood in the marketplace uncomfortable.”

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At 8:31 a.m. ET, Dow e-minis were down 142 points, or 0.56 percent, with 100,431 contracts changing traded. S&P 500 e-minis were down 9 points, or 0.33 percent, with 402,884 contracts traded.  Nasdaq 100 e-minis were down 32.5 points, or 0.48 percent, on volume of 102,573 contracts.

Fourth-quarter earnings growth is now forecast at 13.6 percent for the S&P 500, up from January’s 12 percent forecast.  This week Walt Disney, General Motors and Tesla are scheduled to report their quarterly results.

Wells Fargo dropped 6.9 percent in premarket trading after the Fed inflicted new regulatory restrictions over compliance issues.

Qualcomm dropped 2.3 percent after Broadcom raised its offer to buy the chipmaker, while Broadcom was up 0.8 percent.

Bristol-Myers Squibb gained 3.2 percent after the company stated that a late-stage trial for a lung cancer drug achieved its goal.

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