North American stock indexes ended sharply lower on Tuesday as 10-year Treasury yields held their multi-year highs, with investors still wrestling with prospects for a long period of high interest rates and the economic fallout.
The Dow posted its biggest one-day percentage drop since March, while all three major U.S. averages as well as the Canadian benchmark stock index ended at their lowest closing levels in more than three months.
Adding to investor anxiety was the potential of a partial U.S. government shutdown by the weekend, which ratings agency Moody’s warned would harm the country’s credit.
Benchmark 10-year Treasury yields in both the U.S. and Canada have climbed to 16-year highs in the wake of the Federal Reserve’s hawkish longer-term rate outlook last week.
“We continue to adjust to the higher interest rates,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “What you are getting is increasingly a sense that the market is overvalued. ... There’s a real sense out there that this isn’t sustainable, and buyers are being scared away.”
The Toronto Stock Exchange’s S&P/TSX composite index ended down 244.46 points, or 1.2%, at 19,556.15, its lowest closing level since June 23. Since mid-September, losses have grown to more than 5%.
“Investors are becoming ‘Fed fatigued’ ...trying to comprehend if there’s a way out of a recession, and the current thinking is that higher rates will squash any growth stocks,” said Peter Anderson, founder of Andersen Capital Management.
The outlook for U.S. yields overall remained tilted to the upside as the world’s largest economy has performed better than expected despite aggressive tightening from the Federal Reserve over the last year and a half. After hitting its highest since October 2007, the U.S. 10-year yield was little changed on Tuesday at 4.549%.
Canadian bond yields take much of their direction from their U.S. counterparts, but there are domestic factors at play as well, with recent inflation data coming in higher than most economists had expected. Money markets are pricing in an 80% chance that the Bank of Canada will have further raised its key overnight interest rate by March of next year.
“With this narrative of a more hawkish Fed at last week’s FOMC (Federal Open market Committee) announcement, it seems like yields are likely to hang out here and could push a little bit higher based on a near-term set of risks,” said Zachary Griffiths, senior investment grade strategist at CreditSights in Charlotte, North Carolina.
On Tuesday, the rate futures market priced in a 20% chance of a Fed rate hike in November and a 38% probability of tightening in December, according to CME’s FedWatch. A week ago, that was 29.4% and 41%, respectively.
U.S. data on Tuesday was mixed and analysts pointed out that on balance, the reports showed an economy outperforming expectations, which for some should boost yields even higher.
U.S. annual home price growth accelerated for a second straight month in July, with housing prices increasing 4.6% on a year-over-year basis, up from a revised 3.2% increase in the prior month, the Federal Housing Finance Agency (FHFA) said.
Sales of new U.S. single-family homes, however, fell more than expected in August, with new home sales plunging 8.7% to a seasonally adjusted annual rate of 675,000 units last month, data showed.
U.S. consumer confidence also slid for a second consecutive month in September, a survey showed on Tuesday, with the index dropping to 103.0 this month from an upwardly revised 108.7 in August.
Investors are focused on Friday’s personal consumption expenditures price index for a fresh view of the inflation picture. This week also brings other data including on durable goods and second-quarter gross domestic product, as well as remarks by Fed policymakers such as Chair Jerome Powell.
In Toronto, the market came under further pressure from a slide in bullion prices. The materials sector, which includes precious and base metals miners and fertilizer companies, fell 1.9% as the price of gold briefly traded below $1,900 per ounce.
“Gold is back in the danger zone as Treasury yields rise alongside a stronger (U.S.) dollar,” Edward Moya, a senior market analyst at OANDA, said in a note. A stronger greenback makes gold more expensive in foreign currency terms, denting global demand.
Industrials on the TSX lost 1.6% and heavily-weighted financials were down 1.1%.
Energy was a bright spot, rising 0.8%, as the price of oil settled 0.8% higher at US$90.39 a barrel.
In individual stock moves in Canada, shares of Westshore Terminals Investment Corp ended 10% lower as RBC cut its price target on the stock.
The Dow Jones Industrial Average fell 388.00 points, or 1.14%, to 33,618.88, the S&P 500 lost 63.91 points, or 1.47%, to 4,273.53 and the Nasdaq Composite dropped 207.71 points, or 1.57%, to 13,063.61.
All 11 S&P 500 sectors ended lower. The heavyweight tech sector dropped 1.8%, while the rate-sensitive utilities and real estate groups fell 3.05% and 1.8%, respectively.
The CBOE volatility index, known as Wall Street’s “fear gauge,” closed at its highest level since May 25.
Megacap stocks that have propelled indexes higher this year dragged on Tuesday.
Amazon.com shares dropped 4% as the U.S. Federal Trade Commission filed a long awaited antitrust lawsuit against the online retailer.
In company news, Immunovant shares surged 97% after early-stage data from the drug developer’s experimental antibody treatment exceeded analysts’ expectations.
Declining issues outnumbered advancers by a 5.9-to-1 ratio on the NYSE. There were 37 new highs and 388 new lows on the NYSE. On the Nasdaq, declining issues outnumbered advancers by a 2.1-to-1 ratio. The Nasdaq recorded 35 new highs and 390 new lows. About 10.2 billion shares changed hands in U.S. exchanges, in line with the daily average over the last 20 sessions.
Reuters, Globe staff