Wall Street witnessed broad-based declines on Tuesday with all three major indexes closing in the red. This was primarily attributable to the yields on 10-year U.S. Treasury Note which hit a seven year high. Jump is bond yield is possibly due to U.S. retail sales which rose two consecutive months of March and April raising fear of inflationary pressures. Moreover, U.S. Commerce Secretary Wilbur Ross and U.S. Ambassador to China Terry Branstad commented that trade tensions between United States and China are far from over.
The Dow Jones Industrial Average (DJI) closed at 24,706.41, decreased 0.8% or 193 points. The S&P 500 Index (INX) decreased 0.7% to close at 2,711.45. The Nasdaq Composite Index (IXIC) closed at 7,351.63, decreased 0.8%. A total of 6.60 billion shares were traded on Tuesday, lower than the last 20-session average of 6.67 billion shares. Decliners outnumbered advancers on the NYSE by 1.87 -to-1 ratio. On the Nasdaq, decliners had an edge over advancers by 1.14 to -1 ratio. The CBOE VIX increased 13.2% and closed at 14.63. This was Wall Street’s fear gauge’s largest gain in one day since Apr 2.
How Did the Benchmarks Perform?
The Dow lost 0.8% ending its eighth straight positive session. This was the blue-chip index’s biggest decline in three weeks. Notably, 26 of the 30-stocks in the index closing in the red while 3 traded in the green and 1 remains unchanged.
The S&P 500 decreased 0.7% led by 1.7% decline of the Real Estate Select Sector SPDR (XLRE) and 1.3% decline of Healthcare Select Sector SPDR (XLV). Notably, 10 out of 11 sectors of the benchmark index ended in negative territory.
The Nasdaq Composite also decreased 0.8% led by fall in large tech stock’s prices.
Surge in U.S. Government Bond Yields
On Tuesday, yield on 10-year Treasury note surged 7.5 basis points to 3.070%, its highest since July 2011. This was the biggest jump of the 10-year U.S. Treasury Note in a single day since Mar 1, 2018. Likewise, the 30-year bond yield spiked to 3.210% after gaining 8.1 basis points.
Since bond price and yield are negatively correlated, investors opted for safe haven bonds instead of risky equities. One possible reason for hike in treasury notes yield is strong retail sales data for the month of April as well as March which was revised upwardly. This indicates strong fundamentals of the U.S. economy.
Higher consumer spending may generate inflationary pressure prompting the central bank to pursue aggressive interest rate policy to cooldown the economy. Consequently, hike in interest rate will raise cost of funds for both corporates and individuals resulting in stock market volatility.
Surge in U.S. government bond yields had another negative effect on the economy. The dollar index, which measures the U.S. dollar against a basket of six other currencies, was up 0.7% to 93.22. During Tuesday, the index was up overnight at 93.457, its highest since Dec 22, 2017. A strong dollar will hurt U.S. export.
Trade Tensions Lingers
The ongoing trade conflict between United States and China is showing no sign of abating. The trade tensions which began in March after President Trump imposed tariffs on a large number of Chinses imports have only escalated thereafter. On Tuesday, U.S. Ambassador to China Terry Branstad said that the countries are "very far apart" on trade issues.
On Monday, U.S. Commerce Secretary Wilbur Ross failed to give any specific reason for resolving the U.S--China trade conflict and hoped that good personal relationship between President Trump and Chinese President Xi Jinping may pave the way for a possible solution.
Any escalation of trade conflict will result in imposition of tariffs and retaliatory tariffs between two countries. This will raise general price level of the economy resulting into inflation. Consequently, the Fed will have to raise interest rates more aggressively.
The Commerce Department reported that U.S. retail sales rose 0.3% for the month of April, at par with the consensus estimate. Retail sales are up for two straight months and also rose 4.7% year over year. Notably, the March reading was revised to an increase of 0.8% from the previous figure of 0.6%. Notably, 9 out of a total of 13 industries witnessed an increase in sales in April.
The National Association of Home Builders reported that their sentiment index for the month of May rose 2 points to touch 70. April's reading was revised down 1 point to 68. The index stood at 69 in May 2017. Notably, any reading above 50 is considered positive for home builders.
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