Thursday July 8th

8-07-2021

Dow futures drop nearly 500 points on concerns about the global economic comeback, bond yields slide

U.S. stock index futures fell on Thursday on concern about the global economic comeback from Covid-19. The losses came as Japan declared a state of emergency in Tokyo for the upcoming Olympics and as countries deal with a rebound in cases because of Covid variants. Dow futures dropped 465 points, or 1.4% with losses increasing throughout the overnight session. S&P 500 futures also lost 1.35%. Nasdaq 100 futures fell 1.5%. Both the S&P 500 and Nasdaq Composite closed at records in the prior session because of gains from tech shares. Looking ahead to Thursday’s session, investors will pore over the Labor Department’s latest jobless claims figures. The weekly update offers Wall Street regular insight into the pace of layoffs in the U.S. economy, which has been declining amid the Covid-19 vaccine rollout. The Labor Department’s latest jobless claims data came in unexpectedly higher at 373,000, signaling a slowdown in the the labor picture amid the Covid recovery. Economists expected to see 350,000 first-time applicants for unemployment benefits for the week ended July 3, according to Dow Jones. Premarket losses were led by companies that would benefit from a rapid economic comeback from the virus. Shares of Carnival and Royal Caribbean each dropped more than 3%. American Airlines and Delta Air Lines each fell more than 2% in early trading. Boeing fell 2%. Ford and Nike were also lower. Retailers Lowe’s and Home Depot also dipped in premarket trading. 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 has been in one of those ‘Goldilocks’ stretches when economic growth was accelerating while inflation and interest rates remained low. Increased Covid cases, particularly Delta Variants have caused concerns that the economic acceleration will slow,” Timothy Lesko of Granite Investment Advisors told CNBC. “A few weeks ago the porridge was too hot, now it seems it is too cold. With markets at all time highs and some valuations stretched there is little room for economic slowdown in this market.” Investors rotated into the safety of Treasuries further on Thursday, pushing the yield on the 10-year Treasury below 1.255% to the lowest since late February. Despite the recovering economy and fast inflation, the 10-year Treasury yield continues to decline. It was at 1.58% to start July and hit a 2021 high of 1.78% in March. Traders remain confused about the exact reasons for the rollover in yields, with many citing concern that the best of the economic recovery may be behind us. Bank of America, Wells Fargo, Goldman Sachs and other financial shares declined in premarket trading as their profitability outlook dimmed with lower rates. JPMorgan Chase and PNC Financial were also lower. “Nothing suggests the near slump in yields is over,” wrote Christopher Harvey, head of equity strategy at Wells Fargo, in a note Thursday. “A sharp drop below 1.25% could cause equity PMs to believe that something is wrong or broken. As a result, we see a growing possibility of a 5% selloff in equities before earnings season.” Harvey noted he believes the buying in bonds is more technical in nature and not due to macroeconomic factors. Spectators could be banned from the Olympic games, according to a report following the state of emergency declaration for Tokyo by Japan. Meanwhile the global Covid death toll continued to advance, exceeding 4 million on late Wednesday, as countries including India battle more transmissible variants. The Cboe Volatility index, or ‘VIX,’ surged above the key 20 level Thursday morning, perhaps signaling a period of greater volatility ahead. “The 40 basis point decline in the yield on the benchmark 10-year Treasury note since late-March suggests that the global grab for yield remains a potent force, despite the Fed’s desire to let the economy run hot,” Steven Ricchiuto, U.S. chief economist at Mizuho Securities, wrote in a note this week. “A stronger currency, increased virus concerns oversea, and the associated demand for long-term Treasury notes and bonds implies reduced inflation expectations and increased risk of importing global deflation,” he added. The move lower in futures came after a positive regular session for U.S. markets led by tech 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 advanced 104.42 points to 34,681.79. The technology-heavy Nasdaq Composite closed just above its own flatline to eke out a record close. Popular internet and technology stocks again outperformed the broader market on Wednesday as investors bought equity in companies that prioritize growth instead of the reopening 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 — are each up by double-digits over the last month. While traders have cited several reasons for the shift back into Big Tech, most mention a marked decline in bond yields when discussing the move. Shares in Asia-Pacific mostly declined on Thursday, as Chinese tech stocks in Hong Kong came under pressure after regulatory fears resurfaced. In Thursday afternoon trade in Hong Kong, shares of Tencent dropped 3.74% while Alibaba declined 4.13% and Meituan plunged 6.43%. The Hang Seng Tech index declined 3.71% to 7,321.98. The broader Hang Seng index in Hong Kong led losses among the region’s major markets as it slipped 2.89% on Thursday to 27,153.13. In Japan, the Nikkei 225 closed 0.88% lower at 28,118.03 while the Topix index declined 0.9% to finish the trading day at 1,920.32. The Kospi in South Korea dropped 0.99% to close at 3,252.68. Mainland Chinese shares also closed lower, with the Shanghai composite falling 0.79% to 3,525.50 while the Shenzhen component declined 0.382% to 14,882.90. Oil prices fell for a third day on Thursday amid uncertainty over supply after the collapse this week of talks among major producers which could potentially cause the current output agreement to be abandoned. Brent crude oil futures were down 30 cents, or 0.5%, at $73.09 per barrel, while U.S. West Texas Intermediate futures were down 46 cents, or 0.6%, at $71.76 a barrel. Both contracts were at their lowest in about three weeks. Gold gained on Thursday, building on a five-day winning streak as the U.S. dollar eased and Treasury yields extended their slump to a more than four month low. Spot gold was up 0.6% to $1,814.00 per ounce at 1135 GMT. U.S. gold futures were up 0.7% to $1,814.30.