Stocks extend losses, Nasdaq sinks as Treasury yields climb

Stocks sank Tuesday, with technology stocks leading the way lower as investors nervously eyed a swift rise in U.S. Treasury yields. 

The Nasdaq, a proxy for technology and growth stocks, underperformed against the other two major stock indexes, dropping more than 2%. Both the S&P 500 and Dow also fell by more than 1%. A new disappointing report on consumer confidence in September added to the risk-off mood in markets, with the Conference Board’s closely watched Consumer Confidence Index dropping to the lowest level since February as concerns over the coronavirus lingered.

The rapid rotation away from growth and technology stocks also came as Treasury yields added to recent gains. The yield on the benchmark 10-year note (^TNX) jumped more than 5 basis points to top 1.54%, reaching its highest level since June.

“The prospect of higher energy prices, fueling inflation, and rises in bond yields that appear to be pre-empting tighter monetary policy by central banks, have prompted widespread selling across global stock markets,” Chris Beauchamp, chief market analyst at online trading platform IG, said in an email on Tuesday. “As yesterday, it is the highly-valued growth stocks that have taken the brunt of the selling, as investors fret that a lower growth, tighter policy environment will hurt these previous star performers.”

“Undoubtedly, some of the fabled month/quarter-end movements have a part to play here, fund managers being keen to book some profits as Q3 draws to a close,” he added. “This suggests we have some more volatility to come over the rest of the week.” 

Yields, which move inversely to prices, have held at low levels throughout the pandemic, and rising yields are seen in large part as a bet on a strengthening economic environment. However, the rapid rise in borrowing costs also serves as a headwind to “long-duration” growth stocks, which are valued heavily on future earnings.

Oil prices also added to gains, and positive economic data including a much stronger-than-expected durable goods report out Monday helped underpin the move. West Texas intermediate crude oil futures (CL=F) were on track to climb for a sixth consecutive session and broke above $76 a barrel, or the commodity’s highest price since July. And Brent crude oil, the international standard, touched $80 per-barrel level to reach its highest since October 2018.

“Really what you’re seeing is, across asset classes, the market [is adopting] a pro-cyclical view, which means better growth in the future, higher inflation, higher bond yields,” Tom Essaye, The Sevens Report Research Founder, told Yahoo Finance Live. “You’re seeing that from commodities through to equities.” 

Investors also continued to watch developments out of Washington, with lawmakers facing a deadline this week to fund the government by Thursday night to avert a government shutdown. 

The effort to pass a new government budget has been swept into ongoing debates around whether or not to raise the federal debt ceiling and pass an expansive $3.5 trillion reconciliation package, which would advance a number of initiatives central to President Joe Biden’s economic agenda. In a move widely expected, Senate Republicans on Monday evening blocked a bill that would have funded the government through Dec. 3 and also raised the debt ceiling through the end of 2022. While Democratic lawmakers have called for raising the debt limit to be a bipartisan move, Republicans have argued Democrats, as majority members of both chambers of Congress, should increase it without their support.

Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen began testifying before the Senate Banking Committee Tuesday morning about the Fed and Treasury’s responses to the pandemic. In prepared remarks, Yellen addressed the ongoing debt ceiling debate, reiterating her concern over the negative implications to the U.S. economy, should lawmakers fail to take action.

“It is imperative that Congress swiftly addresses the debt limit. If it does not, America would default for the first time in history,” Yellen said in the remarks. “The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession.”

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