Dow futures fall 170 points as bond yields extend rise

Stock-index futures pointed to a lower start for Wall Street Monday as rising bond yields stoked worries that equities, particularly highflying tech shares, have grown too expensive.

What are major indexes doing?
  • Futures on the Dow Jones Industrial Average
    fell 172 points, or 0.6%, to 31,261.

  • S&P 500 futures
    were off 29.40 points, or 0.8%, at 3,873.50.

  • Nasdaq-100 futures
    dropped 184.50 points, or 1.4%, to 13,391.50.

Stocks put in a mixed performance last week, with the Dow
rising 0.1%, while the S&P 500
booked a 0.7% fall and the tech-heavy Nasdaq Composite
shed 1.7%.

What’s driving the market?

A selloff in Treasurys continued Monday, extending a rise in yields, which move in the opposite direction of prices. Long-term yields last week saw their biggest rise in six weeks. Higher “risk-free” yields make it more difficult to justify high valuations for equities.

“It is no coincidence that stocks hesitated, marked by underperformance of the rate-sensitive Nasdaq-100, after reaching all-time highs early in the week,” said Julian Emanuel, chief equities and derivatives strategist at BTIG, in a note.

Yields have been boosted by expectations that aggressive rounds of fiscal spending on top of extraordinary loose monetary policy by the Federal Reserve will stoke at least near-term inflationary pressures. Meanwhile, equities stand near all-time highs and remain expensive when measured by a variety of valuation measures.

Congress is expected to pass another round of aid spending expected to come in near President Joe Biden’s $1.9 trillion package. Investors were also penciling in the possibility of a large, long-term round of infrastructure spending.

Read: Stock-market investors are already betting on an infrastructure spending spree

Meanwhile, the rollout of vaccines and falling COVID-19 case levels continue to stoke expectations for an acceleration in economic activity this year even as the number of U.S. deaths nears a milestone of 500,000.

“A material acceleration in long-end yields combined with a continued rally in real yields could present a further headwind for equities, with the prospect for month-end asset allocation rebalancing (sell stocks, buy bonds) due at the end of this week, Emanuel said.

That said, rising rates and a steepening of the yield curve favors financial stocks, which have plenty of room to outperform the broader S&P 500, he said.

Rising yields and inflation worries were also seen underlining worries over a potential reaction by the Federal Reserve, even though the central bank has it is committed to holding off until inflation moves above its 2% target.

“The difficulty for equity investors is that the further the Fed gets behind market forecasts both for GDP and rates, the greater the worry over a tantrum” by market participants over a potential Fed tightening, said Sean Darby, global head of strategy at Jefferies, in a note.

The Fed’s deliberate efforts to displace market expectations by overshooting its 2% target should alow for further steepening of the yield curve, while real, or inflation-adjusted, rates remain negative, allowing cyclicals and companies with low variable costs to outperform, he said.

Fed Chairman Jerome Powell is set to testify before Congress on monetary policy this week.

Leading economic indicators for January are due at 10 a.m. Eastern. Economists expect the index to show a rise of 0.4%.

Which companies are in focus?
  • Shares of Dow component Boeing Co.
    fell more than 3% in premarket trade after United Airlines Holdings Inc.
    said it is temporarily removing Boeing 777 planes from service after an engine blew apart in flight over the weekend. Boeing recommended grounding aircraft with that model engine. Shares of Raytheon Technologies Corp.
     the parent of Pratt & Whitney, which made the engine, slid 2.9% in premarket trade, while United’s stock inched up less than 0.1%.

  • Shares of Kohl’s Corp.
    jumped more than 8% in premarket trade after The Wall Street Journal reported that a group of activist investors have taken a big stake in retailer in an attempt to take control of its board.

  • Goodyear Tire & Rubber Co.
    said Monday it would acquire Cooper Tire & Rubber Co.
     in a deal with an enterprise value of about $2.5 billion. Cooper shares jumped more than 13%, while Goodyear shares fell more than 4%.

  • New York-based M&T Bank Corp.
     announced Monday it had reached an agreement to buy Connecticut-based People’s United Financial Inc.
     in an all-stock deal valued at $7.6 billion. People’s United shares rose more than 8%, while M&T shares were down 0.6%.

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