September 29, 2021: -On Tuesday, U.S. stock futures were lower, with Nasdaq futures taking the biggest hit as climbing bond yields pressured tech stocks.
Futures on the Nasdaq-100 index dropped 1.5%. S&P 500 futures shed 0.8%, while Dow Jones Industrial Average futures lost about 129 points or 0.4%.
The 10-year Treasury yield continued its quick climb on Tuesday, rising as high as 1.545% at one point overnight as investors bet the Fed would carry through on its promise to curb its emergency bond-buying stimulus as inflation jumps. The 10-year yield has reversed dramatically to the highest levels since June since the Fed signaled last week it would taper its $120 billion in monthly bond purchases “soon.”
The 10-year rate was as low as 1.29% at one point last week and was as low as 1.13% as recently as August. The 30-year Treasury yield has also been on the move, topping 2%.
Tech shares were dropping in premarket trading as a rapid rise in rates made their future cash flows less valuable, and in turn, made the popular stocks appear overvalued. Higher rates also hinder tech companies’ ability to fund their growth and buy back stock.
“When you see declines like this is the futures, it is typically a multi-billion fund getting out ahead of what they think will be a three to four percent down move in tech,” wrote CNBC’s Jim Cramer on Twitter. “So give it some room.”
Facebook, Amazon, Apple, Netflix, and Alphabet shares lost more than 1% in premarket trading. Large chip stocks like Nvidia and AMD shed 2%, and Tesla lost 1.6% in the premarket.
The drop in tech dragged down sentiment on the markets though there were pockets of strength. Energy stocks such as Exxon rose in premarket trading as WTI crude topped $76 a barrel.
“Rather than ending the equity rally, we expect the rise in yields to favor cyclical sectors like financials and energy overgrowth sectors like technology, which experience a bigger drag on the present value of future cash flows from higher rates,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
On Monday, also weighing on sentiment was a budget showdown in Washington. Senate Republicans blocked a House-passed bill that would have funded the government into December and suspended the debt ceiling until December 2022. Congress must approve government funding by Friday to avoid a shutdown and raise the debt ceiling soon to avoid an unprecedented U.S. default.
On Monday, Equities saw an uneven session between the spike in rates.
On Monday, the Dow Jones Industrial Average gained 71 points, and the small-cap Russell 2000 rallied 1.5%. However, the S&P 500 decreased 0.3%. The Nasdaq Composite was the relative underperformer, dipping 0.5%, as the drop in bond prices pressured growth names like Microsoft and Amazon.
On Tuesday, Traders will be watching testimony from Federal Reserve Chair Jerome Powell to the Senate Banking Committee. In prepared remarks, the central bank chief said that inflation could persist longer than expected.
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