Jump In Bond Yields May Lead To Choppy Trading On Wall Street

The major U.S. index futures are pointing to a roughly flat open on Wednesday, with stocks likely to extend the lackluster performance seen in recent sessions.

Traders may be reluctant to may significant moves amid uncertainty about the near-term outlook for the markets amid a jump in bond yields.

The yield on the benchmark ten-year note has risen to its highest levels in almost a year, raising concerns about potential inflation risks.

The ten-year yield has seen further upside following the release of a report from the Commerce Department showing retail sales rebounded by much more than anticipated in the month of January.

Potentially adding to inflation concerns, a separate report from the Labor Department showed producer prices jumped by much more than expected in the month of January.

Nonetheless, the Dow may benefit from advances by shares of Chevron (CVX) and Verizon (VZ), which are moving notably higher in pre-market trading after Warren Buffett’s Berkshire Hathaway revealed increased stakes in the blue chip stocks.

After climbing to new record intraday highs early in the session, stocks turned mixed over the course of the trading day on Tuesday. The Dow managed to hold onto a modest gain, while the broader Nasdaq and the S&P 500 slid into negative territory.

While the Dow crept up 64.35 points or 0.2 percent to a new record closing high of 31,522.75, the Nasdaq fell 47.98 points or 0.3 percent to 14,047.50 and the S&P 500 edged down 2.24 points or 0.1 percent to 3,932.59.

The early strength on Wall Street largely reflected recent upward momentum, which has propelled the major averages to new record highs despite a lack of major catalysts.

Optimism about additional stimulus from Washington has helped prop up the markets as Democrats continue to move forward with President Joe Biden’s proposed $1.9 trillion relief package.

Recent signs indicating the coronavirus crisis is easing following a recent surge has also generated buying interest as countries around the world continue to ramp up vaccine rollouts.

The positive sentiment also came following last Friday’s drop by the CBOE Market Volatility Index, which closed below 20 for the first time in nearly a year.

The decrease by the closely watched volatility index suggests there is reduced fear in the markets following the spike seen in reaction to speculative trading in stocks like GameStop (GME).

Buying interest waned over the course of the morning, however, leading some traders to cash in on the recent strength in the markets.

In U.S. economic news, the Federal Reserve Bank of New York released a report showing New York manufacturing activity grew at its fastest pace in months in February.

The New York Fed said its general business conditions index climbed to 12.1 in February from 3.5 in January, with a positive reading indicating growth in regional manufacturing activity. Economists had expected the index to rise to 6.0.

With the much bigger than expected increase, the general business conditions index reached its highest level since hitting 17.0 last September.

Despite the lackluster close by the broader markets, many of the major sectors showed notable moves over the course of the session.

Substantial strength was visible among steel stocks, as reflected by the 3.1 percent spike by the NYSE Arca Steel Index. The index ended the session at its best closing level in a month.

Airline stocks also showed a significant move to the upside on the day, driving the NYSE Arca Airline Index up by 3 percent to a nearly one-year closing high.

Banking stocks also moved sharply higher, benefiting from a jump in treasury yields. The KBW Bank Index surged up by 3 percent to its best closing level in over a year.

Energy stocks also saw substantial strength. The rally by energy stocks came as the price of crude oil for March delivery climbed above $60 a barrel after a winter storm shut down oil wells and refineries in Texas.

Reflecting the strength in the energy sector, the NYSE Arca Oil Index soared by 2.9 percent, while the Philadelphia Oil Service Index and the NYSE Arca Natural Gas Index jumped by 2.3 percent and 2.1 percent, respectively.

On the other hand, biotechnology stocks moved sharply lower on the day, dragging the NYSE Arca Biotechnology Index down by 2.6 percent.

Considerable weakness also emerged among gold stocks, resulting in a 2.6 percent nosedive by the NYSE Arca Gold Bugs Index. The sell-off by gold stocks came amid a steep drop by the price of the precious metal.

Housing stocks also showed a significant move to the downside on the day, as reflected by the 2.5 percent slump by the Philadelphia Housing Sector Index.

Commodity, Currency Markets

Crude oil futures are advancing $0.86 to $60.91 a barrel after climbing $0.58 to $60.05 a barrel on Tuesday. Meanwhile, an ounce of gold is trading at $1,778.50, down $20.50 compared to the previous session’s close of $1,799. On Tuesday, gold tumbled $24.20.

On the currency front, the U.S. dollar is trading at 106.17 yen compared to the 106.04 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is trading at $1.2035 compared to yesterday’s $1.2106.

Asia

Asian stocks ended mixed on Wednesday as surging bond yields driven by increasing inflationary concerns overshadowed hopes for a vaccine-led economic recovery.

Chinese markets remained closed for the Lunar New Year holidays. Hong Kong’s Hang Seng index recovered from an early slide to end 338.28 points, or 1.1 percent, higher at 31,084.94 on optimism over the global recovery outlook.

Japanese shares ended lower despite positive economic data and the beginning of a Covid-19 vaccination drive, starting with medical workers.

The Nikkei 225 Index slid 175.56 points, or 0.6 percent, to 30,292.19 after finishing the previous session at a fresh 30-year high.

Tire maker Bridgestone tumbled 4.1 percent, a day after reporting a net loss for the first time in 69 years in 2020. Semiconductor equipment maker Tokyo Electron dropped 2.2 percent, while aviation company ANA Holdings advanced 4.2 percent.

On the economic front, Japan posted a merchandise trade deficit of 323.9 billion yen in January, a government report showed, beating forecasts for a shortfall of 600 billion yen.

Separately, the Cabinet Office said the total value of core machine orders in Japan gained a seasonally adjusted 5.2 percent month-on-month in December, beating expectations for a decline of 6.2 percent.

Australian markets ended lower after two sessions of gains. The benchmark S&P/ASX 200 Index ended down 32.10 points, or 0.5 percent, at 6,885.20, slipping from a one-year closing high. The broader All Ordinaries Index dropped 30.50 points, or 0.4 percent, to 7,158.80.

Gold miner Evolution Mining lost 10 percent and Northern Star Resources plunged 7.6 percent as gold futures fell below the $1,800 mark amid a stronger U.S. dollar and hardening of U.S. bond yields.

Healthcare stocks fell broadly, with CSL, Ramsay Health Care and Resmed losing 2-4 percent. Grocery chain Coles Group plummeted 5.4 percent after the company warned of a moderation in sales in its biggest revenue generator supermarkets division.

On the positive side, lender Westpac soared 4.6 percent after announcing a steep rise in quarterly cash earnings. Miners BHP and Rio Tinto jumped over 3 percent each after copper prices climbed to a nine-year high.

Treasury Wine Estates rallied 2.4 percent despite the winemaker reporting a drop in its half-yearly profit.

Seoul stocks snapped a three-day winning streak amid strong foreign and institutional selling that stemmed from concerns over rising bond yields.

The benchmark Kospi slumped 29.52 points, or 0.9 percent, to 3,133.73. Market bellwether Samsung Electronics gave up 2 percent and No. 2 chipmaker SK Hynix declined 1.9 percent.

New Zealand shares advanced as the earnings season picked up pace. The benchmark NZX-50 Index rose 63.25 points, or 0.5 percent, to 12,673.97.

Contact Energy jumped 3.7 percent amid news of a $400 million capital raise, while Meridian Energy surged 5.5 percent.

Europe

European shares have moved to the downside during trading on Wednesday as concerns about inflation temper optimism over a swifter economic recovery.

While the German DAX Index has fallen by 0.5 percent, the U.K.’s FTSE 100 Index is down by 0.2 percent and the French CAC 40 Index is down by 0.1 percent.

British American Tobacco has slumped. The cigarette manufacturing company said it expects a continuing impact from the coronavirus pandemic this year.

Swiss food and beverage giant Nestle SA is also moving lower after announcing its agreement to sell Nestlé Waters North America to One Rock Capital Partners LLC in partnership with Metropoulos & Co. for $4.3 billion.

Dutch supermarkets and eCommerce company Ahold Delhaize N.V. has also fallen after it swung to a net loss in the fourth quarter of 2020.

Beiersdorf AG shares have also tumbled. The maker of Nivea, Eucerin and La Prairie products said that it did not expect a recovery in profitability in 2021.

French luxury goods company Kering, whose portfolio of brands includes Saint Laurent and Balenciaga, has also plunged after it suffered a sales slowdown during the key Christmas shopping season.

On the other hand, banking stocks are gaining ground on expectations that they would benefit from higher yields.

Rio Tinto shares have also surged. The miner rewarded investors with the biggest dividend in its history after reporting its biggest annual profit in nine years.

Paints and chemicals maker Akzo Nobel N.V. has also moved to the upside after its fourth-quarter earnings beat market view.

U.S. Treasury yields held near their highest in a year as vaccine rollouts and stimulus measures spurred bets of a likely spike in inflation.

In economic releases, U.K. consumer price inflation rose slightly to 0.7 percent from 0.6 percent in December, data from the Office for National Statistics showed. The rate was forecast to remain stable at 0.6 percent.

U.S. Economic Reports

Following recent declines in U.S. retail sales, the Commerce Department released a report on Wednesday showing retail sales rebounded by much more than anticipated in the month of January.

The Commerce Department said retail sales spiked by 5.3 percent in January after sliding by a revised 1.0 percent in December.

Economists had expected retail sales to jump by 1.1 percent compared to the 0.7 percent decrease originally reported for the previous month.

Excluding sales by motor vehicle and parts retailers, retail sales soared by 5.9 percent in January after tumbling by a revised 1.8 percent in December.

Economists had expected ex-auto sales to increase by 1.0 percent compared to the 1.4 percent slump originally reported for the previous month.

The Labor Department released a separate report showing U.S. producer prices jumped by much more than expected in the month of January.

The Labor Department said its producer price index for final demand surged up by 1.3 percent in January after rising by 0.3 percent in December. Economists had expected producer prices to increase by 0.4 percent.

Excluding food and energy prices, core producer prices still shot up by 1.2 percent in January after inching up by 0.1 percent in December. Core prices were expected to edge up by 0.2 percent.

At 9 am ET, Richmond Federal Reserve President Thomas Barkin is due to participate in a panel before a virtual Maryland Chamber of Commerce State of the State event.

The Federal Reserve is scheduled to release its report on industrial production in the month of January at 9:15 am ET. Industrial production is expected to rise by 0.4 percent in January after jumping by 1.6 percent in December.

At 10 am ET, the National Association of Home Builders is due to release its report on homebuilder confidence in the month of February. The housing market index is expected to come in unchanged at 83.

The Commerce Department is also scheduled to releases its report on business inventories in the month of December at 10 am ET. Business inventories are expected to increase by 0.5 percent.

Also at 10 am ET, Boston Federal Reserve President Eric Rosengren is due to participate in moderated question-and-answer session before a webinar hosted by the Concord Coalition and University of New Hampshire Franklin Pierce Law School.

The Treasury Department is scheduled to announce the results of this month’s auction of $27 billion worth of twenty-year bonds at 1 pm ET.

At 2 pm ET, the Federal Reserve is due to release the minutes of its latest monetary policy meeting held January 26-27.

Dallas Federal Reserve President Robert Kaplan is scheduled to participate in moderated conversation on national and global economic issues before a virtual Global Perspectives series hosted by the Dallas Fed at 6:05 pm ET.

Stocks In Focus

Shares of Vir Biotechnology (VIR) are moving sharply higher in pre-market trading after the announced an agreement to GlaxoSmithKline (GSK) to expand their existing collaboration on coronavirus therapies to include the research and development of new therapies for influenza and other respiratory viruses.

Newspaper publisher Tribune Publishing (TPCO) is also likely to see initial strength after agreeing to be acquired by hedge fund Alden Global Capital for $17.25 per share in cash.

On the other hand, shares of La-Z-Boy (LZB) may come under pressure after the furniture maker announced Kurt Darrow will retire from his positions as President and CEO on April 25, 2021. CFO Melinda Whittington will replace Darrow.

Slack Technologies (WORK) may also move to the downside on news the Justice Department’s antitrust division has asked for more information related to the workplace messaging app’s acquisition by Salesforce.com (CRM).