Dow futures drop 500 factors on worries about international financial comeback, bond yields slide
Futures contracts pegged to major U.S. stock indices fell on Thursday amid concerns over the global economic comeback of Covid-19. The losses came as Japan declared a state of emergency for the upcoming Tokyo Olympics and countries struggled to recover in Covid variant cases.
Dow futures fell 525 points, or 1.5%, with losses increasing during the night session. S&P 500 futures also lost 1.45%. Nasdaq 100 futures fell 1.5%. Both the S&P 500 and the Nasdaq Composite closed the previous session at record highs on gains from technology stocks.
The pre-trading losses were led by companies that would benefit from a swift economic comeback for the virus. Carnival and Royal Caribbean stocks fell more than 3% each. American Airlines and Delta Air Lines each fell more than 2% in early trading. Boeing was down 2%. Ford and Nike were also lower. Retailers Lowe’s and Home Depot also fell in pre-trading hours.
Chip stocks also fell on concerns about the pace of the global recovery. Micron, NVIDIA, Qualcomm, Intel and Applied Materials also ticked lower in the premarket.
“The market was on one of those ‘goldilocks’ stretches as economic growth accelerated while inflation and interest rates remained low. The rise in Covid cases, particularly Delta Variants, has raised fears that the economic acceleration will slow down.” said Timothy Lesko of Granite Investment Advisors told CNBC. “A few weeks ago the porridge was too hot, now it seems too cold. With markets hitting all-time highs and some valuations being overdone, there is little room for economic slowdown in this market.”
Investors continued to switch to government bond security on Thursday, pushing 10-year government bond yields below 1.255% to their lowest level since late February. Despite the economic recovery and rapid inflation, the yield on 10-year government bonds continues to decline. It stood at 1.58% in early July and hit a 2021 high of 1.78% in March. Traders are confused about the exact reasons for the yield increase, and many cite concerns that the best of the economic rebound is behind us could be.
Bank of America, Wells Fargo, Goldman Sachs, and other financial stocks fell in pre-trading hours as their profitability prospects clouded with lower interest rates. JPMorgan Chase and PNC Financial were also lower.
“Nothing to suggest that the near-collapse in yields is over,” wrote Christopher Harvey, head of equity strategy at Wells Fargo, in a statement Thursday. “A sharp drop below 1.25% could lead the stock PMs to believe something is wrong or broken. As a result, we see a growing possibility of a 5% sell-off in stocks ahead of earnings season.”
Harvey noted that he believes that buying bonds is more technical in nature and not driven by macroeconomic factors.
Spectators could be excluded from the Olympic Games, according to a report after Japan’s declaration of emergency for Tokyo.
Meanwhile, the global Covid death toll continued to surge, topping 4 million late Wednesday as countries like India battle more communicable variants.
The Cboe Volatility Index or “VIX” rose above the key 20 level Thursday morning, possibly indicating a period of greater volatility ahead.
“The 40 basis points decline in benchmark ten-year government bond yields since late March suggests that global earnings after yields remain a strong force despite the Fed’s desire to let the economy run hot,” said Steven Ricchiuto. US chief economist at Mizuho Securities wrote in a note this week.
“A stronger currency, increased virus worries overseas and the associated demand for long-term Treasury bills and bonds imply lower inflation expectations and an increased risk of importing global deflation,” he added.
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The downward move in futures came after a positive regular session for US markets led by technology stocks on Wednesday.
The S&P 500 rose 0.3% to an all-time high of 4,358.13, while the Dow Jones Industrial Average climbed 104.42 points to 34,681.79. The tech-heavy Nasdaq Composite closed just above its own flatline to hit a record close.
Popular internet and technology stocks again outperformed the broader market on Wednesday as investors bought stocks of companies that prioritize growth rather than the reopened names in the energy and retail sectors that proved popular in the first half of the year.
Apple, Microsoft, and Amazon – up 1.8%, 0.8%, and 0.5% on Wednesday – were each up double-digit last month. While traders have cited several reasons for switching back to big tech, most mention a significant drop in bond yields when discussing the move.
Looking ahead to Thursday’s meeting, investors will ponder the latest unemployment claims figures from the Department of Labor. The weekly update gives Wall Street regular insights into the pace of layoffs in the U.S. economy, which has declined during the introduction of the Covid-19 vaccine.
According to the Dow Jones, economists expect 350,000 first-time applicants for unemployment benefits by the week ending July 3.