Shares started to recover on Tuesday after a sharp decline sent the market to new lows. Bond yields are also trending lower.
Dow Jones Industrial Average futures rose 206 points, or 0.6%. S&P 500 futures pointed to a green open of 0.8%, while the tech-heavy Nasdaq Composite was expected to gain 1.5%.
This comes after a sharp sell-off in all three major indexes over the past three days, hitting fresh year-end lows. The S&P 500 was down 16% for the year through Monday’s close, as the Federal Reserve raised interest rates and cut bond holdings in response to high inflation. The moves could slow economic growth and have led to a sell-off in bonds, pushing up their yields. China’s blockade has also restricted global companies’ access to supplies, another factor driving up costs and threatening profit margins.
Lower bond yields will give stocks a slight boost on Tuesday. The 10-year government bond yield fell to 3% from Friday’s pandemic-era closing high of 3.13%, but remains above 1.51% at the end of 2021. The problem is that higher bond yields make future profits less valuable, and therefore stock valuations. Hence, the stock market is encouraged to see the 10-year yield – for now – show signs that it will stop rising.
Early trading on Tuesday may be encouraging, but stocks are far from over the top. More recently, its decline has taken it to a new yearly low, and its small rally has taken it to lower highs — before the next sell-off happens. This means that market participants have less confidence in the economy and the market outlook and are therefore less willing to buy stocks at higher levels. Markets may not have finished pricing in economic risks.
“While (market) setbacks are common, investors should be more cautious given the Fed embarking on a protracted effort to reduce stimulus,” wrote Richard Saperstein, chief investment officer at Treasury Partners.
Overseas, the pan-European Stoxx 600 rose 1%, but Hong Kong’s Hang Seng caught up with Wall Street’s slump on Monday, falling 1.8%.
“European equities and U.S. futures are trying to recover this morning, but we’re still wondering if a bottom has been reached,” said Neil Wilson, analyst at Broker Markets.com.
The digital asset space also underperformed. Bitcoin, the largest cryptocurrency, fell nearly 5 percent over the past 24 hours to $31,500 after trading around $36,000 on Friday, before settling down for the weekend.
In the deepest part of Tuesday’s trading, Bitcoin broke above the key $30,000 level, a level it hasn’t traded below since late 2020. “Bitcoin is a good risk barometer right now, and we see its decline as evidence of significant deleveraging,” Bitcoin Wilson said.
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