US Stocks Add To Losses On Worries About Interest Rates

10 February, 2018, 11:06 | Author: Dave Hampton
  • Fuel on fire

Stocks closed lower Wednesday, but not before swinging wildly to sharply higher and lower levels, as interest rates rose.

"We continue to argue that accelerating inflation, robust growth outlook and expansive financial conditions facilitate continued Fed rate hikes (we now expect four this year) and together with an increasing bond supply speaks in favor of higher USA rates", said Lina Fransson, fixed income strategist at SEB in Stockholm, in a note. Traders are now putting the chances of a 25 basis point hike by the Fed at its March meeting at 84.5 percent, according to Thomson Reuters data.

This could be the worst week for stocks since the financial crisis. "We've all enjoyed it", said Rich Guerrini, CEO of PNC Investments.

USA stocks pulled back on Wednesday after heavy selling lifted the 10-year Treasury yield back to 2.85%, matching a four-year high. The bond market is a decent indicator of fears about inflation.

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Yet another Federal Reserve official said today that the central bank is not spooked by stock market fluctuations. "Is the bond market telling us something we don't know? A lot of people are groping around trying to find the cause of the equity sell-off and most people are pointing to expectations for higher bond yields", said Michael Schumacher, director of rate strategy at Wells Fargo. Crude slumped 3.5% on Friday and slipped below $60 a barrel for the first time this year.

Investors are weighing whether the sharp swings this week are the start of a deeper correction or just a temporary bump in the prolonged bull market. But with the yield topping 2.88 percent Thursday, and the S&P down 7 percent in the past week, stocks are already uncomfortable. That compares with $420 billion net a year ago in notes and bonds. Some stock strategists say the stock market may have found a near term bottom Wednesday but the volatility is expected to continue.

"At this point a lot of it is about risk assets", said Ian Lyngen, head of USA rates strategy at BMO Capital Markets in NY. "It can take two to three weeks to work through the system". "There was euphoria because there hadn't been a pullback", said Jeffrey Schulze, investment strategist at ClearBridge Investments.

Shares have headed south again on Wall Street.

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New York Federal Reserve President Bill Dudley told Bloomberg News on Thursday that if the USA economy keeps getting stronger the central bank may be justified in raising rates four times this year. The U.S. Senate reached a bipartisan deal Wednesday that would boost spending limits by $300 billion over the next two years. The federal budget deficit could top $1 trillion in fiscal 2019, according to Bank of America.

On Tuesday, Wall Street staged a dramatic turnaround. Rates may have to go up to attract buyers for those bonds.

Despite the heavy losses this week, the Dow remains up 36% since Trump's election. His promises for big corporate tax cuts helped lift the Dow more than 8,000 points, though it has since given back about a quarter of that surge. Corporate earnings have never been higher, and US and global economic growth has gathered momentum. Brenner said the US yield was tethered to the German bund yield early Thursday, and both moved up together.

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