Stock Market Today
Futures in the United States and Europe are lower today as investors pay attention to soaring treasury yields. It seems that hawks have convinced the Federal Reserve to begin tapering in November 2021 and this is creating a drama in the markets. The rise in yields is compelling investors to abandon growth stocks like Microsoft and Amazon in favor of stocks that are positively linked to economic recovery.
A number of Fed officials are slated to speak today, and it is highly likely that it may rattle the markets today. In addition to this, we also have the US Consumer Confidence data which is likely to bring higher volatility in the markets.
In yesterday’s session, the Dow Jones Industrial Average jumped 0.21%, and the S&P 500 index slumped 0.28%. The Nasdaq, the tech-savvy index, dipped 0.52%, and the Russell 2000, the small-cap index, rose 1.46%.
After the Federal Reserve’s tilt in perspective, prices for 10-year treasury bonds dropped, causing treasury yields to rise and even surpass the 1.5% mark, a level not witnessed since earlier in June. The move in treasury yields shows that investors believe that monetary tightening through rate hikes is imminent, with many investors expecting the first-rate hike at the end of 2022.
The rise in yields, on the other hand, has investors worried that technology and growth stocks are overvalued. As a result, technology stock prices fell, causing the Nasdaq to trail other major indices. Stocks of economically sensitive companies, such as energy companies, rose. As the Fed begins to withdraw quantitative easing measures, investors are more likely to gravitate toward government-backed securities with fixed coupon payments rather than gaining exposure to overvalued companies.
Stock traders should note that Fed Chair Jerome Powell spoke yesterday and discussed the reasons for rising inflation. He believes inflationary pressures may persist for a longer period of time than previously anticipated. The reopening of the economy and the return of consumer spending to pre-pandemic levels are the major drivers of the persistent rise in consumer prices. Furthermore, the supply side is finding it difficult to meet rising demand due to bottlenecks in certain segments of the economy. Although these factors have persisted for a longer period of time and in greater magnitude than anticipated, they will eventually fade, and inflation will likely fall to the Fed’s long-term target of 2%.
Moving onwards, a major factor affecting the performance of equity markets is the government’s ability to get agreement on a funding plan. Investors should understand that although funding may be extended for the short term and on a temporary basis, the bigger issue of raising the country’s’ debt ceiling may prevail for several weeks ahead.
Moreover, data for US durable goods orders came in better than expected. New orders jumped 1.8% versus the expected 0.65% rise. Investors should also keep in mind that German GfK and US consumer confidence are set to be released today.
Looming Energy Crisis
The likelihood of an impending energy crisis grows with each passing day, as countries race to secure gas supplies before winter months arrive. Countries are becoming more reliant on gas for their energy needs as they shift away from harmful fuels and toward more environmentally friendly sources of energy. However, there isn’t enough gas to meet rising demand. As a result, countries are attempting to secure higher-priced gas supplies even at higher prices, while gas-producing countries such as Russia are unwilling to export and are storing it to meet their own domestic demand.
Gas supply constraints are likely to have ramifications for European industries, with potential spillover effects on other parts of the world. Governments have already warned of potential blackouts and factory disruptions. Similarly, output from other energy sources such as wind turbines has considerably decreased due to calmer weather, and nuclear power plants are being cut back, making gas even more important for the region.
Fears of an energy crisis in Europe are supporting oil prices that have been rising for seven days in a row, with Brent, the benchmark for crude oil, climbing above $80 per barrel. On Monday, Brent crude settled at $79.53 per barrel, rising 1.84%, while WTI crude settled at $75.45 per barrel, rising 2.00%. The surge in gas prices has made oil a relatively cheaper substitute for power generation and hence its appeal has increased. Similarly, India, the second biggest importer of crude oil, has also ramped up its oil imports, to a three-month high in August, as refiners begin to stock up as they project higher demand going forward.
Gold prices fell as treasury yields and the dollar index soared. The dollar index rose to 93.37 as investors reacted to positive data indicating an increase in critical orders for capital goods manufactured in the United States. Similarly, treasury yields have risen as stock market players foresee a hike in the Fed’s policy rate as early as 2022. Treasury yields and the dollar index typically move in the opposite direction of gold prices, so a rise in these metrics caused gold prices to fall.
Asian Pacific equity markets are on a decline after various renowned financial institutions revised down China’s GDP growth forecasts. According to Goldman Sachs, China’s GDP is forecasted to grow 7.8% versus the 8.2% projected earlier. Similarly, according to Nomura, China’s GDP is forecasted to grow 7.7% versus the 8.2% projected earlier. As of 11.35 p.m. EST, the Nikkei dropped 0.33% while the Shanghai Composite Index surged 0.44%. Seoul’s Kospi declined 0.74%. The ASX 200 index fell 0.98% and the Hang Seng index, in Hong Kong, hopped 1.69%.