Equities end lower as bond yields hit two-year highs

US stock indices fell on Tuesday and bond yields hit two-year highs as investors worried about whether the Federal Reserve would raise interest rates faster and more aggressively than expected.

Investors who came after a holiday weekend that had closed markets on Monday sold shares and bonds across the board. All three indices fell, with the S&P 500 falling 1.8% and the Dow Jones Industrial Average falling 1.5%. Nasdaq Composite fell 2.6 percent.

Meanwhile, yields on the benchmark 10-year government bond ticked up to 1.866% – the highest level in two years – from 1.771% on Friday. Interest rates rise when bond prices fall.

Equities and bonds have been in a tumultuous state since the start of the year. All three stock benchmarks have fallen by at least 2.5% so far in 2022. The question is how much and how fast the Fed will act in an attempt to tame violent inflation, with investors increasingly convinced that the central bank will act more powerful.

Interest rate futures markets indicate that investors are now betting on four to five rate hikes this year, up from three to four on Friday, according to

CME Group.

“Markets are still trying to find a level of rate hikes. It was not until October that the market expected one rate hike for 2022, and now it expects four,” said Edward Park, chief investment officer at UK investment firm Brooks Macdonald. we’re in the market right now about how Fed policy is going. “

Some of the toughest sales have been focused on high-growth stocks, whose earnings will look less attractive in an environment of rising prices. Fund managers who have been researched by Bank of America research teams in recent weeks have found that many reduced their exposure to technology, pushing allocations to the sector to their lowest point since 2008.

It played on Tuesday. Shares in technology and communications services fell by 2.1% and 1.7% respectively.

Meta platforms,

Facebook’s parent company, fell more than 4%.

Netflix

and

Alphabet

fell over 2 per cent.

“We’re experiencing a liquidity pullback and it’s really scaring the market,” said Jack Janasiewicz, a portfolio manager and senior portfolio strategist at Natixis Investment Managers Solutions.

The Cboe Volatility Index – Wall Street’s so-called fear meter, also known as the VIX – ticked up to 22.90, the highest level in a month. “The uncertainty surrounding the timing and pace of [Fed’s] action is likely to keep markets on edge in the first half of the year, ”Ross Mayfield, an investment strategy analyst at Baird Private Wealth Management, wrote in a note on Tuesday.

He added that market turbulence has been most acute across growth stocks, which have had their worst start in a year relative to value stocks since 1995.

The recent quarterly earnings season has not helped. Several financial firms have reported results showing that profits have begun to ebb after a year in which many benefited from the tumultuous pandemic economy.

Goldman Sachs

was the latest to report Tuesday, showing one decline in fourth-quarter profitswhich sends the shares down 7% and seems like a big move on the price-weighted Dow.

Financial stocks largely followed. Online brokerage business

Charles Schwab

fell 3.6% after the company reported fourth-quarter profits that rose but came below analysts’ estimates. Analysts said a rise in shares across the sector in recent weeks is likely to have contributed to shares of Schwab and others gaining significant hits after the release of earnings.

Meanwhile, stocks are off

Activision Blizzard

jumped almost 26%

Microsoft

agreed to buy video game heavyweight, which has been hit by allegations of dishonesty in the workplace. Microsoft stock fell 2.4 percent. Other game stocks rose, among others

Electronic art,

which added 2.7 per cent.

Investors expect the Federal Reserve to implement more rate hikes this year.


Photo:

timothy a. clary / Agence France-Presse / Getty Images

Oil prices rose as geopolitical tensions in the Middle East heightened concerns about tight supply, sending energy companies’ shares up 0.1%, the only S&P 500 sector in positive territory on Tuesday. Futures for West Texas Intermediate, the mainstay of U.S. crude oil, rose 1.9% to $ 85.43 per share. barreltheir highest closing level since October 2014.

Oil prices have generally moved higher, as the recent rise in Covid-19 cases failed to curb demand for the commodity. Organization of the Oil Exporting Countries raised its demand estimate with 260,000 barrels per day in the fourth quarter of 2021, reflecting stronger than expected consumption. This has helped push up energy stocks by 15% during the first weeks of the year, while most other sectors of the S&P 500 are in the red.

Abroad, the pan-continental Stoxx Europe 600 fell by 1%, with the largest losses in the technology and travel and leisure sectors.

Major indices in Asia closed largely lower, although China’s Shanghai Composite received the trend, adding 0.8%. South Korea’s Kospi fell 0.9%, Japan’s Nikkei 225 fell 0.3% and Hong Kong’s Hang Seng fell 0.4%.

The US dollar last year saw its biggest appreciation since 2015. It is good for many US consumers, but it can also put a dent in equities and the US economy. WSJs Dion Rabouin explains. Photo illustration: Sebastian Vega / WSJ

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Michael Wursthorn at michael.wursthorn@wsj.com

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