Dow futures plunge as bond yields shoot higher, while oil hits a 7-year high
- Dow futures fell 250 points early Tuesday, as bond yields rose to levels not seen since before the pandemic.
- Tech stocks look set to resume their slide, with investors betting the Fed will move to tackle hot inflation.
Dow futures tumbled Tuesday as bond yields continued their march higher, while oil prices rallied to a 7-year high to fan inflation fears.
Dow Jones futures were down 228 points, or 0.63%, and S&P 500 futures were 1.01% lower, as of 5.40 a.m. ET. Meanwhile, futures for the tech-heavy Nasdaq 100 index were down 1.63%. All were recovering somewhat from deeper drops earlier in European trading.
The moves suggest stocks could fall sharply when the markets reopen later in the day, after closing for the Martin Luther King Jr. Day holiday Monday.
Equities have endured a rocky start to the year as investors braced for the Federal Reserve to raise interest rates in a bid to cool red-hot inflation. Traders expect the Fed to hike rates four times im 2022, by 25 basis points per increase.
Bond prices have slumped, and yields have risen sharply, as expectations for higher future interest rates prompt investors to seek a higher return.
Those elevated bond yields have whacked tech stocks, and the Nasdaq 100 has lost more than 5% so far this year. Companies whose full earnings potential lies far in the future look less attractive when the so-called risk-free interest rate — the return on government bonds — is higher.
The yield on the key 10-year US Treasury note rose 3.8 basis points to 1.83% in European trading Tuesday, its highest level since January 2020. It had earlier hit 1.854%.
"We think it's another challenging year for fixed income investors," Hugh Gimber, market strategist at JPMorgan Asset Management, told Insider. "I think it's perfectly feasible to get another year of negative returns from global government bonds."
Gimber said tech stocks are likely to remain under pressure as higher bond yields, strong growth and soaring inflation send investors elsewhere.
"We think that equity leadership will be more cyclical," he said. "You'll see stronger returns from value-tilted sectors, such as the banks, such as energy. You're likely to see quite a different stock-market leadership to the one you've seen over the past decade."
European stocks fell in early trading Tuesday, with the continent-wide Stoxx 600 down 1.29%, and London's FTSE 100 0.85% lower.
Asian stocks were mixed overnight, with China's CSI 300 rising 0.97%, and Tokyo's Nikkei 225 down 0.27%.
Expectations of strong economic growth helped push oil prices to their highest level in seven years, while an attack by Houti rebels on major producer UAE also weighed. Analysts said rising prices were contributing to stock-market fears about inflation.
WTI crude, the US benchmark, climbed 1.87% to $85.37 a barrel. Brent crude, the international benchmark, rose 1.36% to $87.66 a barrel. Both were trading at highs not seen since the fall of 2014.
"Supply outages combined with a strong demand trajectory is supporting the uptrend with $90 as the next major technical resistance level to watch," Victoria Scholar, head of investment at trading platform Interactive Investor, said.
Earnings season was set to continue Tuesday, with investors hoping stronger-than-expected results can boost equities after their shaky start to 2022. Goldman Sachs, Morgan Stanley and Netflix are among those reporting this week.
Elsewhere, bitcoin continued to struggle, with crypto markets hit by the same risk-aversion that has weighed on tech stocks. The token was down 2.7% to $41,684 Tuesday, according Bitstamp data, well below a record high of close to $69,000 reached in November.