Wall Street Close: Powell sends bond yields surging, stocks tumbling

Thursday saw US equities sell-off for a third straight day. The S&P 500 closed below the 3800 level for only the second time since the start of February, losing 1.3% or about 50 points on the day. Admittedly, the index saw a decent bounce from 3725 lows, closing the session just under 3770. The Dow Jones Industrial Average faired slightly better, dropping 1.1%, though the index did lose its grip on the 31K level, while the Nasdaq 100 dropped 1.7% to under 12,500 and the Russell 2000 2.8%.

Following Thursday’s losses, the S&P 500’s losses on the month now stand at 1.1% and the index’s gains on the year have now been eroded to just 0.3%. The picture is worse for the Nasdaq 100; the index is now down nearly 3.5% on the month, is down 3.3% on the year and has now backed off 10% from recent highs. That means the Nasdaq 100 is ow in “correction” territory. Things aren’t anywhere near as bad for the non-tech heavy Dow, which is flat on the month, still up 1% on the year and 3.3% down from recent highs.

In terms of sectoral performance, the S&P 500 energy sector (+2.5%) was the outperformer amid a stunning rally in crude oil markets. Oil markets shot higher (WTI +4.6%) on the news that OPEC+ would not be increasing oil output in April and the Saudi Arabians would roll over their current 1M barrel per day voluntary output cuts (which had been scheduled to end at the end of this month) through the month of April. Meanwhile, the S&P 500 utilities sector index only dropped a modest 0.2% and the Communications Services sector index was flat, amid 1.1% gains seen in Google shares and 0.9% gains seen in Facebook. Most other sectors faired poorly.

Driving the day

US bond yields have surged for a second consecutive day on Thursday; the 10-year yield, after rallying 9bps on Wednesday, is up another nearly 7bps on Thursday and trading around the 1.55% mark. Real yields have also surged, with 10-year TIPS yields up 9bps on the day to above -0.65%.

The rally in US bond yields comes following remarks from Fed Chair Jerome Powell at an online WSJ event; Powell stuck to his usual dovish script but failed to give the market “what it wanted”. What the market wanted was for Powell to talk about the kinds of policies the Fed might employ to fight rising bond yields (like yields curve control or weighted average maturity extension etc.). He refused to be drawn into talking about these topics, which seems to have been interpreted as reluctance to fight rising bond yields, hence why they have spiked higher.

Rising yields, as has so often been the case since mid-February, have ended up being a negative for the stock market, particularly given the yield on the 10-year bond went back above the S&P 500 dividend yield (of 1.48%). Investors seem to fear that, amid expectations for a rapid post-lockdown/end-of-pandemic economic recovery and further fiscal stimulus, long-term bond yields might go a lot higher and as of yet, there is no certainty from the Fed as to when they might intervene or how.

Looking ahead, focus will be on Friday’s official US Labour Market survey on Friday. A stronger than expected number (possible given lockdown easing across the US in February) could at as a further bond yield upside, which is most likely to again be a stock market negative.