U.S. Opening Bell: Spiking Yields Pressure Stocks; Dollar Keeps Rising

 | Apr 18, 2022 06:35

  • Treasury yields surpass 3-year highs
  • 10:2 yield curve flattens
  • China warns of economic challenges, offsetting faster growth
    • h2 Key Events/h2

    A selloff in Treasuries on Monday, dragged U.S. futures lower. All four contracts—for the S&P 500, Dow Jones, NASDAQ and Russell 2000—were in the red to start the trading week. Markets in Europe, as well as those in Australia and Hong Kong are closed for Easter Monday.

    Oil slipped on fears of slowing demand out of China.

    h2 Global Financial Affairs/h2

    Though all US futures are currently trading lower, contracts on the NASDAQ 100 and the Russell 2000 are underperforming. That's because big tech companies and small-cap domestic firms are the most sensitive to higher interest rates. Conversely, non-tech mega-cap multinational businesses listed on the Dow provide the best protection from spiking inflation.

    Today's Treasury selloff comes ahead of an array of speeches this week by Federal Reserve officials, who may provide investors with fresh clues regarding the central bank's path to higher interest rates. The same sentiment was apparent today from Asian traders.

    Asian equities opened lower on Monday as traders closed positions when Chinese officials offset higher than expected economic growth by warning of "significant challenges ahead" despite the stronger-than-anticipated GDP.

    Also weighing on investor sentiment in Asia, is the first COVID fatality from the current outbreak in China's largest city and financial hub, Shanghai, even as the case count remains elevated.

    Though the world's second-largest economy posted 4.8% Q1 growth despite harsh pandemic lockdowns, China's National Bureau of Statistics poured cold water over the heating economy, warning :

    "We must be aware that with the domestic and international environment becoming increasingly complicated and uncertain, economic development is facing significant difficulties and challenges."

    The Shanghai Composite declined by 0.5%, but Japan's Nikkei 225 was the regional underperformer, finishing -1.1%. Technology stocks slumped on the prospect of higher rates, an outlook that grew worse as Treasury yields rose.

    The benchmark 10-year Treasury yield neared 2.9% today, for the first time in more than three years—approaching our secondary target of a few weeks ago—as investors continue to price in higher interest rates, a likely response to higher inflation.

    While the accelerating yield on the 10-year may ease concerns of a yield curve inversion between the benchmark note and the 2-year Treasury, seen by many as a leading indicator of an upcoming recession, the yield spread be is still flattening.