Wall Street suffered heavy losses on Tuesday asyields on 2-Year US Treasury Note and 3-Year US Treasury Note surpassed the yield on 5-Year US Treasury Note. Moreover, investors become skeptical regarding a permanent solution to eight-month trade conflict between the United States and China. All three major stock indexes closed deep in the red.
The Dow Jones Industrial Average (DJI) closed at 25,027.07, plunging 3.1% or 799.36 points. The S&P 500 Index (INX) plummeted 3.2% to close at 2,700.06. Meanwhile, the Nasdaq Composite Index (IXIC) closed at 7,158.43, tumbling 3.8% or 283.09 points. A total of 9 billion shares were traded on Tuesday, higher than the last 20-session average of 7.7 billion shares. Decliners outnumbered advancers on the NYSE by 4.24-to-1 ratio. On the Nasdaq, decliners had an edge over advancers by 5.96-to-1 ratio. The CBOE VIX increased 26.2% to close at 20.74.
How Did the Benchmarks Perform?
The Dow ended in negative territory reversing its two-day winning streak. Notably, all 30 components of the blue-chip index closed in the red. Meanwhile, the tech-heavy Nasdaq Composite closed in the red reversing its two-day winning run. The tech-laden index also entered into correction territory.
The S&P 500 also closed in the red after two straight-day of win. The benchmark also fell below its 200-day moving average. This is an important psychological barrier indicating more downward movement in the long-term. The Financials Select Sector SPDR (XLF), Industrials Select Sector SPDR (XLI), Technology Select Sector SPDR (XLK), Consumer Discretionary Select Sector SPDR (XLY) and Communication Services Select Sector SPDR (XLI) lost 4.4%, 4.3%, 3.8%, 3.6% and 3%, respectively. Notably, ten out of total 11 sectors of the benchmark index closed in the red while only one finished in the green.
Sovereign Bond Yield Inversion
On Dec 4, yields on 2-Year US Treasury Note (2.811%) and 3-Year US Treasury Note (2.808%) outpaced the yield on 5-Year US Treasury Note (2.79%). This indicates short-term interest rates are higher than long-term interest rates. This happens when market participants become more uncertain about economic growth. For many industry experts, this is a clear signal of an impending economic slowdown.
Moreover, the yield on 10-Year Treasury Note closed at 2.921%, its lowest in three months and largest single-day decline since Oct 11. The benchmark government bond yield also fell below its 200-day moving average at 2.957%. This is an important psychological barrier indicating further decline in yield on the1010-Year US Treasury Note in the long-term.
Following these developments, the spread between the yields of 2-Year and 10-Year US Treasury Notes stood at 11 basis points, the narrowest gap in 11 years. A yield inversion between 2-Year and 10-Year government securities is generally considered as a recessionary indicator for the U.S. economy. Additionally, yield on very long-term 10-Year US Treasury Note fell 10.2 basis points to 3.174%, its lowest level in more than 2-months and largest single-day fall since May 29.
Following yield curve inversion, shares of major banking stocks like JPMorgan Chase & Co. (JPM - Free Report) , The Goldman Sachs Group Inc. (GS - Free Report) and Citigroup Inc. (C - Free Report) plunged 4.5%, 3.8% and 4.5%, respectively. JPMorgan Chase & Co and Citigroup carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Skepticism Over US – China Trade Truce
Investors have become skeptical regarding a permanent solution to eight-month trade conflict between the United States and China. On Dec 1, the U.S. President Donald Trump and his Chinese counterpart Xi Jinping reached an initial agreement per which the trade truce will be valid for next 90 days.
However, there was confusion regarding the starting date. Trump’s economic adviser Larry Kudlow announced the clock will start from Jan 1, 2019. However, White House later corrected it with a starting date of Dec 1, 2018.
Finally, on Dec 4, President Donald Trump once again reminded China that tariff is still an important weapon for him. In a series of tweets, Trump said, “a deal between the two countries would get done if possible. “But if not possible remember ... I am a Tariff Man.”
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