Wall Street closed sharply lower on Monday following intensification of U.S.-China trade dispute, heightened geopolitical issues and concerns about a global economic slowdown. Investors opted for safe-haven government bonds to a large extent resulting in significant decline in sovereign bond yields. All three major stock indexes plunged on Monday.
The Dow Jones Industrial Average (DJI) tumbled 1.5% or 391 points to close at 25.896.44. The S&P 500 declined 1.2% to close at 2,882.44. Meanwhile, the Nasdaq Composite Index closed at 7,863.41, shedding 1.2%. The fear-gauge CBOE Volatility Index (VIX) jumped 17.4% to close at 21.09. A total of 6.09 billion shares were traded on Monday, lower than the last 20-session average of 7.24 billion. Decliners outnumbered advancers on the NYSE by a 2.33-to-1 ratio. On Nasdaq, a 2.10-to-1 ratio favored declining issues.
How Did The Benchmarks Perform?
The Dow closed in negative territory for the second straight day with 29 components of the 30-stock blue-chip index closing in the red while one finished in the green. The S&P 500 also closed in negative territory for second consecutive day. The Financials Select Sector SPDR (XLF) and Materials Select Sector SPDR (XLB) lost 1.9% and 1.6%, respectively. Notably, all 11 sectors of the benchmark index closed in the red. The Nasdaq Composite declined for the second successive day due to weak performance from large-cap stocks.
Yields on U.S. Government Bonds Plunge
On Aug 12, yield on the benchmark 10-year US Treasury Note plummeted 9.1 basis points to 1.64%, its lowest since October 2016. The 2-year US Treasury Note yield dropped 5.1 basis points to close at 1.578%. Meanwhile, the yield on long-term 30-year US Treasury Note plunged 11.1 basis points to 2.13%. This government bond is only three basis points away from its all-time low set in July 2016. However, the short-term 3-month Treasury Bill is currently yielding around 2%.
Several economists consider inversion between the 3-month and 10-year bond yields as a clear indication of an upcoming recession. However, a more powerful indicator is the yield inversion between 2-year and 10-year U.S. Treasury Notes., which is currently just 6 basis points away to take an inverted shape.
Falling yields resulted into sharp decline of shares of major banks. The Goldman Sachs Group Inc. GS, Bank of America Corp. BAC and JPMorgan Chase & Co. JPM plummeted 2.6%, 2.4% and 1.9%, respectively. All three stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Geopolitical Concerns Intensify
The 3-month old political protest in Hong Kong against the Chinese establishment took an ugly turn on Aug 12 as about 5,000 protesters entered Hong Kong International Airport, one of the world’s busiest, forcing the authority to cancel over 100 flights for the rest of the day.
The mass movement started after the Chinses government introduced an extradition bill in April following which Hong Kong citizens can be extradited to mainland China to face trial if suspected of crimes against the Asian giant. The movement now takes a pro-democracy turn against the communist China.
However, Hong Kong is the largest financial hub of Asia and a major tourist spot. Hong Kong’s close financial proximity with Europe and the United Sates is very crucial for global economy. Several economists warned that further escalation of political turmoil in Hong Kong may become a bigger threat to the global economy than the U.S-China trade spat.
On Aug 12, the Argentina peso fell 15.3% against the U.S. dollar after a surprise result of a primary election for the country’s President. Alberto Fernández won more than 47% of the vote in primary ahead of the incumbent Mauricio Macri’s less than 33% vote.
Investors fear that likelihood of Alberto Fernández chance to win final election in October will bring populist policy overstepping business-friendly policy adopted by Mauricio Macri. Notably, Argentina is long facing economic downturn with unemployment rate of 9.5% and inflation rate of a significant 55%.
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