US Stocks Add To Losses On Worries About Interest Rates

Fuel on fire

On Friday, New York's Dow closed down 666 points, with the S&P and Nasdaq also down sharply.

For some analysts, the sell-off was expected after stocks in Asia climbed to record highs in some cases.

Only last month the Dow and benchmark S&P 500 index had their best monthly gains in two years, with stocks reaching record levels on January 26, supported by the benefit of a cut in USA corporate taxes in December, rising earnings, and healthy global economic growth.

Wall Street is attempting to stage a lasting rebound from Monday, when fears about the bond market sent the Dow plunging a record 1,175 points.

Since the 2008 financial crisis, buying when bond prices dipped usually led to quick profits, because central banks around the world stuck with ultralow rate regimes.

European shares fell 5.3 percent for the week, their biggest weekly drop since January 2016.

"This is not the end of the world, but it is uncomfortable", said Rich Guerrini, CEO of PNC Investments.

Equity investors are anxious the likelihood of a stronger US economy and higher inflation could lead the Federal Reserve to boost interest rates more times than previously anticipated.

Benchmark 10-year notes last fell 2/32 in price to yield 2.8403 percent, from 2.832 percent late on Wednesday. This will resurrect the ghosts of the bond market vigilantes of the Clinton-era in the 1990s.

Ryan Detrick, of LPL Financial, said: "The bond market has definitely got the stock market's attention".

We already knew that high market valuations were likely to exacerbate volatility, as was the absence of any meaningful pullback in all of a year ago.

"If there is going to be a recession, it will be next year, not this year, but there could be a slowdown in the United States economy as inflation is picking up, which could lead to stagflation in Q2 and Q3", he said.

But trading has been choppy, and the market has swung in wide ranges. After the S&P 500 had its worst day in six years on Monday, falling 4.1%, it rose by 1.7% on Tuesday. That only happened eight times all of previous year, the fewest since 1964, according to LPL.

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"There's more of a risk that they go four times than two", Lisa Hornby, fixed-income portfolio manager at Schroders Investment Management, told Business Insider.

"This is the beginning of more meaningful setback in a market that was, at least from the nonfinancial sectors, very overvalued and there was a lot of euphoria", said Jonathan Garner, a global emerging market strategist at Morgan Stanley. "It can take two to three weeks to work through the system".

And though the tumble in the S&P 500 may be nothing but a breather, concern is mounting that the Treasury market's travails are becoming an inescapable portent for stocks. But such calm is unusual, and stocks overheated.

Wall Street has enjoyed a record-breaking run ever since Trump's 2016 election on hopes of a beneficial impact from the USA president's pro-business tax-cutting policies. "There was euphoria because there hadn't been a pullback", said Jeffrey Schulze, investment strategist at ClearBridge Investments.

Last week, rising bond yields prompted the Bank of Japan (BoJ) to intervene in the bond market for the first time since July a year ago. The was at 2.81 percent from a high of 2.88 percent earlier in the day and the rising yields had started the stock market spiral lower.

Furthermore, in Europe five-year German bund yields moved into positive territory for the first time since November 2015.

Bond traders, who not long ago had doubted the Fed's resolve to hike rates even three times this year, are increasingly betting that a fourth interest rate increase may be in the offing.

It is an iron law of finance math (discounted cash flow, specifically) that future cash streams like corporate earnings and dividends are worth steadily more as interest rates fall.

Also underpinning yields, U. S. federal deficit further and could fan inflation. A higher fiscal deficit forces the government to go for higher market borrowings.

The Trump administration's de facto weak dollar policy may be exacerbating market volatility.

The Dow plunged more than 1,100 points on Monday, in its biggest daily point decline ever, as a stronger-than-expected USA jobs report stoked fears that interest rates would be hiked quicker than previously anticipated. Rather, it's the rapidity of the move that has proven unnerving for global stock markets.

"The U.S. economy is on solid foundation", said ClearBridge's Schulze. The job market remains healthy, as evidenced by a report Thursday that applications for unemployment benefits are at a 45-year low.

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