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Dow drops 400 points amid global economic recovery concerns, bond yields slide

Dow drops 400 points amid global economic recovery concerns, bond yields slide

08 Jul 2021

The major U.S. stock indexes 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.

The Dow Jones Industrial Average dropped about 400 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.

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.

So-called meme stocks took big hits on Thursday as the sell-off caused investors to flee stocks like AMC and GameStop that had been boosted by speculative trading by retail traders chatting on Reddit.

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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.