US futures are trading higher, while those in Europe are trading lower after yesterday’s massive sell-off which dragged the Dow Jones Industrial Average down nearly 569 points. The slump in stock markets was caused by a hotchpotch of reasons, including rising treasury yields, the debt ceiling faceoff between Democrats and Republicans, and the forthcoming energy crisis in Europe and China.
Today’s appearance by Fed Chair Jerome Powell at an ECB forum on central banking and the home sales data could likely drive market movement today. In yesterday’s session, the Dow Jones Industrial Average dropped 1.63%, and the S&P 500 index slumped 2.04%. The Nasdaq, the tech-savvy index, dipped 2.83%, and the Russell 2000, the small-cap index, fell 2.25%.
Investors should be aware that since the Fed’s meeting last week, treasury yields have been rising, indicating that markets expect the central bank to raise interest rates sooner than previously anticipated. The chairman of the Federal Reserve cautioned on Tuesday that inflation might last longer than the central bank expected. He went on to say that, even though the economy is improving and showing signs of strength, consumer prices are still rising due to supply chain bottlenecks.
Updates from the central bank have sparked worries among investors regarding the outlook of equity markets going forward. The Fed’s plan to start tapering in 2021 and expectations of a rate hike in 2022 are fuelling a surge in treasury yields, which move opposite to prices. Yield on 10-year Treasury bonds rose to 1.567%, their highest yield since June, before falling again. The yield on 30-year Treasury bond jumped to 2.094%, increasing nearly 10-basis points.
Following the rise in treasury yields, the price of technology stocks has reached rock bottom. Stock prices of Alphabet, Facebook, Amazon, and Microsoft took a substantial beating. This is because a rise in yields has an adverse impact on the valuations of high-growth companies, as the present value of future earnings takes a hit. As a result, the Nasdaq index dropped 423 points. Investors are now moving away from big tech to companies that have a higher correlation with economic recovery.
Looking back on yesterday’s shift in market sentiment, it is clear how important the fed’s stimulus was for markets. The quantitative easing strategy aided the US economy’s recovery from peak pandemic era’s doom. Now, uncertainty caused by potential tapering of bond purchases will most likely be the source of volatility in coming months.
The standoff between Democrats and Republicans over the debt ceiling is another factor that contributed to yesterday’s decline in major indices. Republicans have stalled the Biden administration’s attempt to lift the country’s debt ceiling in front of the Senate, despite the fact that the US Treasury has less than three weeks before it runs out of funds to cover its short-term obligations.
Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have both warned of the potentially dire ramifications of the government failing to lift the debt ceiling. According to the Treasury, the government has until October 18th to reach an agreement, after which the department will be left with inadequate cash to satisfy its obligations, and the government will face default. Investors should incorporate a potential government shut down in their risk assessment frameworks over the next few weeks.
Energy and Supply Chain Issues
As if investors didn’t have enough on their minds already, they now have to worry about an energy crisis, which is expected to worsen during the winter months. According to recent reports, even China, the world’s largest exporter, is not immune to this crisis. Energy holdups for Chinese factories are likely to exacerbate the already critical issue of supply side pressures, as Beijing expects producers to reduce output to save energy. Moreover, the timing of this predicament could not be worse because businesses are already struggling to meet rising demand caused by the end-of-year shopping season. The increase in demand and reduction in supply, as a result of rising input costs and a shortage of shipping containers, is likely to contribute to inflation.
Producers in China have warned that strict government controls will have a significant impact on production and output in locations such as Guangdong, Jiangsu, and Zhejiang provinces, which contribute roughly one-third of China’s GDP. The reasons given for the power cut are that the government is attempting to meet its targets for reducing harmful emissions, while some are experiencing a lag in power generation.
Similarly, European countries are seeing a rapid rise in electricity prices due to a lack of gas supplies. According to reports, on Tuesday, Russia’s supply of natural gas to Europe has dropped to nearly half of what it was on Monday. Investors should closely monitor the situation in order to respond proactively in the event of a major update that has a negative impact on stock markets.
The dip in stock market indexes in the United States also had a negative effect on crypto markets. Over the last few days, Bitcoin, the king of cryptocurrencies, has been hovering between $40,000 and $44,000. As of 11.07 p.m. EST, it is trading at nearly $41,670. However, investors should note that money has been incoming to funds and products in the blockchain space. Last week, a total of $50.2 million was invested in Bitcoin, while $95.5 million entered the digital sector. Similarly, over the last six weeks, a total of $320 million entered the digital sector.
Oil prices have been rising in recent days, supported by rising demand as economies recover from the coronavirus pandemic amid a power crisis in Europe and China, which would force governments to switch to crude oil to generate more electricity and meet their nations’ needs. Traders should keep in mind that crude oil inventories data will be released today. Last week’s data showed a significant drop in stockpiles due to lower production by Gulf of Mexico refineries and rising demand. This week’s data will most likely show a drop of 2.5 million barrels. If this is correct, oil inventories will have fallen for eight weeks in a row.
Gold prices are falling because of rising treasury yields. Investors usually view the precious metal as a hedge against rising consumer prices. However, rising yields push the commodity’s appeal down. Treasury yields are surging because investors are expecting central banks to raise their interest rates sooner as they brawl to control rising inflation.