Traders on the floor of the New York Stock Exchange.
Source: The New York Stock Exchange
Forward contracts linked to the major US stock indices fell during the overnight session on Thursday night after a rising interest rate earlier in the day helped push the Nasdaq Composite to its worst session since October.
Dow futures fell 150 points, or 0.5%, while Nasdaq 100 futures fell 0.9%. S&P 500 futures lost 0.5%.
The movements in extended trading took place on Thursday after a negative regular trading session.
The Dow Jones industrial average fell 559 points, or 1.8 percent, from a record high. The S&P 500 lost 2.5% to clinch its worst day since January 27, while the tech-savvy Nasdaq Composite lost 3.5% and suffered its biggest one-day sale since October 28.
The momentum that brought equities to an everyday high earlier this month has resisted amid a sudden and noticeable rise in yields. The rate on the US ten-year treasury note briefly rose to 1.6% on Thursday before falling back to around 1.52%, the highest level since February 2020.
The 10-year yield has been rising by more than 50 basis points since the beginning of the year, a rapid rise for a mortgage rate used as a benchmark for mortgage rates and car loans.
Economists and investment managers believe that the rise in rates is an appropriate response in the bond market to a positive economy, as vaccines are rolled out and GDP forecasts improve, which could benefit corporate profits.
But the rising pace of the rise has also dampened investors’ appetite for richly valued parts of the market. Thursday’s increase in the 10-year return also put it above the S&P 500 dividend yield, meaning that equities – which are considered riskier assets – lost that fixed-payment premium on bonds.
“Until recently, market participants were able to digest the upward shift in long-term rates, but it appears that the next interest rate is a greater chance to chew,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. said an email.
“If we look at where real returns were, it was simply too low considering our growth expectations, and it is likely that long-term real returns will continue to float higher as economic data improves,” he added.
Popular big-tech stocks like Alphabet, Facebook and Tesla, which all started the year strong, fell 3.2%, 3.6% and 8% on Thursday. Apple, one of the largest cash-heavy companies in the world, dropped more than 15% in the past month.
Instead of technology, where companies usually borrow more, investors move money to so-called reopening transactions, buying their shares from companies that benefit most from vaccinating the vaccine and returning to regular travel and dining trends.
Energy rose 6.8% this week alone, the biggest winner amid expectations that consumers around the world will soon be driving and flying like before the Covid-19 pandemic. Industry sectors and finance are so far the only two other sectors in the green week.
Sign in to CNBC PRO for exclusive insights and analysis, and live workday programming from around the world.