Stocks were proceeding cautiously on Monday, with bond yields at higher levels of the Covid-19 pandemic, as investors considered monetary policy and the timing of interest rate hikes from the Federal Reserve.
Futures for the Dow Jones Industrial Average signaled an open 20 points, or less than 0.1%, after closing 4 points lower at 36,231 on Friday. Futures for the S&P 500 and Nasdaq were set for a similar open just above flat.
Overseas, the pan-European Stokes 600 was down 0.1%, while Hong Kong’s Hang Seng index rose 1.1%.
Investors are grappling with the new reality of tighter monetary policy ahead.
Last week, minutes from the Federal Reserve’s policy group—the Federal Open Market Committee (FOMC), showed the central bank heading for first, rapid interest rate hikes and ultimately quantitative tightening. Friday’s jobs report outlined expectations that the Fed will raise rates in March as it grapples with high inflation.
“All told, more than three hikes have been priced in the markets during 2022, but you have to say that unless the financial situation is particularly dire, all seven meetings will take place. [of the FOMC] are now potentially in the game from the end of March to 2022,” said Jim Reid, a strategist at Deutsche Bank.
“The highlight of the coming week will clearly be the US [consumer-price index data] on Wednesday,” Reid said. The CPI is a major measure of inflation.
While shares tumbled on Friday, it remains to be seen how investors will handle the expected first rate hike in March.
“Historically, stocks tend to perform well in months leading up to the first rate hikes of a cycle. Since 1983, the S&P 500 has risen an average of 5.3% in the three months before the first Fed rate hike, said Mark Heifel, chief investment officer at UBS Global Wealth Management.
Neil Wilson, an analyst at BrokerMarkets.com, said the S&P 500 index is now coming off losses not seen since September 2021.
“The index is now sitting around the 50-day moving average support, which has been completely bought over the past year,” Wilson said. “Every time the index flirts with this level it sparks a new rally, but we’re not in Kansas anymore, Toto-Fed is in dire mode.”
Bond yields have also increased on the prospect of higher interest rates and the Fed’s outlook for a stronger economy. The yield on the benchmark 10-year US Treasury note was just shy of 1.8% on Monday, after starting at 1.53% last week, its highest level since the start of the Covid-19 pandemic.
The rise in yields put pressure on tech stocks, with the tech-heavy Nasdaq index falling 4.5% last week. Valuations of many technology stocks depend on the assumption of profit years in the future, and high bond yields discount the present value of future cash.
In commodity markets, crude oil prices were rising on Monday, with the futures contract for international oil benchmark Brent rising 0.5% to above $82 a barrel. US futures for West Texas Intermediate Crude were similar near $79.50.
“Assuming that Omicron passes and the global recovery and international travel continue to improve, oil supply/demand dynamics will continue to move toward higher demand and constrained supply,” said Jeffrey Haley, an analyst at broker Oanda. “I wouldn’t be the least bit surprised if Brent crude and WTI rise to $100 a barrel in the coming months.”
Here are three stocks trending Monday:
BMW (ticker: bmw.germany) rose 2.8% in Frankfurt after the auto maker’s shares were upgraded to buy at Goldman Sachs,
Royal Caribbean (RCL) was down 0.3% in US premarket trade. The cruise line said on Friday it would cancel several cruises arriving on the Omicron version of the more contagious—but apparently mild—coronavirus.
Modern Land (1107.HK), a heavily indebted Chinese property developer and peer to troubled real estate giant Evergrande, fell 40% in Hong Kong. Stocks returned to the market on Monday after a suspension of more than two months, and stocks fell amid reports of early repayment demands on some corporate bonds.
Write to Jack Denton at [email protected]