Stock Market Today
US and European futures are trading lower as investors struggle to take a stance on how equity markets are likely to perform in 2022. This is because we are living in confusing times when new coronavirus variants keep on emerging while consumer prices keep on rising, forcing the Fed to adopt aggressive policies. This uncertainty has propelled Treasury yields to climb higher and triggered the massive selloff we witnessed among major stock market indices in yesterday’s session.
In yesterday’s session, the Dow Jones Industrial Average fell 1.51%, while the S&P 500 index slumped 1.84%. The Nasdaq, the tech-savvy index, dropped 2.60% and the Russell 2000 dipped 3.06%.
Moving forward, investors should pay close attention to how major stock market indices perform in relation to key technical support levels, as any breach of these critical lines could drag overall sentiment down and prompt another selloff like the one we witnessed yesterday. Furthermore, stock traders should keep an eye on treasury yields to see how the market believes the Fed will move interest rates in the coming months.
Similarly, earnings season is now in full swing, and corporate earnings reports may drive volatility in the coming days as well. The World Economic Forum is also scheduled to take place today, and comments from central bank officials and notable personalities may have an impact on market volatility.
Over the last few days, the main factor influencing stock markets has been treasury yields, which have been climbing higher due to anticipation that the Fed may become more hawkish regarding the upcoming interest rate hikes. Yields on 10-year Treasury bonds began the year at nearly 1.5% and have since surpassed 1.87%, the highest level in nearly two years. In the meantime, yields on 2-year Treasury notes jumped above 1% as well. Yields for two-year bonds are considered a proxy for expectations of interest rates in the short term.
Investors should note that the rise in treasury yields hurt the Nasdaq the most, as it comprises stocks of companies that are highly sensitive to rising interest rates. This is because valuations of technology companies are mainly driven by higher future cash flows. However, the present value of these future cash flows declines because of higher interest rates. These events drag down stock prices of these companies as investors adjust for the lower valuations.
Another factor negatively influencing stock market sentiment is the weaker than anticipated earnings of banks. Yesterday, Goldman Sachs published its earnings report, which showed earnings per share (EPS) coming in at $10.81, versus the expected $11.76 despite the bank’s revenue being $12.64 billion versus the projected $12.08 billion. The main culprits behind the lower-than-expected profits were rapidly rising expenses, which jumped nearly 23%, owing to higher salaries of Wall Street employees and a rise in litigation reserves. Earnings reports from Morgan Stanley and Bank of America are expected to be released today.
MasterCard, one of the biggest players in digital payments, has been actively pursuing partnerships with companies operating within the crypto sector. In the latest turn of events, MasterCard announced a deal with Coinbase which will allow consumers of the crypto exchange to use credit and debit cards issued by MasterCard to carry out transactions in its forthcoming NFT marketplace.
The alliance with MasterCard is likely to help Coinbase provide a more efficient and secure experience to its NFT customer base. Currently, the process of purchasing NFTs is very cumbersome, which includes opening a digital wallet, purchasing digital currencies, and then using these digital currencies to procure NFTs. The platform to be provided by MasterCard is likely to provide more payment options to consumers wanting to purchase NFTs.
Crude oil prices have been supported by geopolitics in recent weeks, allowing Brent, the global benchmark for crude oil, to surpass $85 per barrel. The threat of a Russian attack on Ukraine had already been driving up oil prices, and now the attack in Abu Dhabi on Monday, which claimed three lives, has exacerbated the already rising crude oil prices. Following the attack, the UAE announced that it would retaliate against Houthi militants. Because of the rise in tensions, forecasts of crude oil prices spiking above $100 per barrel in 2022 have become very realistic.
The rise in treasury yields and expectations of higher interest rates are having a negative toll on gold prices. However, higher volatility and the slump in equity markets has helped the precious metal to cap its losses to some extent. Moving onwards, the biggest event for the yellow metal is next week’s Federal Reserve meeting which is likely to provide hints on the highly anticipated interest rate hikes which are likely to start as soon as March. Investors should understand that higher interest rates raise the opportunity cost of holding the non-interest-bearing asset, making it less appealing for investors.
The U.S. dollar rose on Tuesday, driven by expectations that the Federal Reserve will likely go on with raising interest rates faster than markets initially expected, which would likely mean more inflows of capital into the United States by investors chasing higher risk-free returns. On the other hand, the yen depreciated in value against the U.S. dollar after the Bank of Japan indicated that it will likely stick to its supportive monetary policy while global central banks are moving in the opposite direction.
Asian Pacific Markets
Investor sentiment in Asian Pacific markets has recently dipped, as investors remain cautious in the aftermath of yesterday’s bloodbath in American stock markets. As of 10.28 p.m. EST, the Nikkei dropped 1.81% and the Shanghai index dipped 0.20%. The Hang Seng index, in Hong Kong, hopped 0.19%. The ASX 200 index fell 0.76% and the Seoul Kospi declined 0.64%.