Bond yields slide, and the U.S. Treasury yield curve inverts further
U.S. stocks closed lower Tuesday, reversing morning gains, as hopes for a resolution of the U.S.-China trade fight began to fade, and as fears of a global economic slowdown mounted.
How did the major benchmarks fare?
The Dow Jones Industrial Average DJIA, -0.47% fell 120.93 points, or 0.5%, to close at 25,777.90, while the S&P 500 index SPX, -0.32% was down 9.22 points at 2,869.16, a 0.3% fall. The Nasdaq Composite index COMP, -0.34% retreated 26.79 points, or 0.3%, to 7,826.95.
At session highs, the Dow had risen 115.19 points, or 0.6%, the S&P 500 added 20.39 points, or 0.7% and the Nasdaq had gained 23.93 points, or 0.3%. At its lowest point, the Dow fell nearly 300 points before recovering.
What drove the market?
After recovering Monday from Friday’s sharp sell-off, stocks gave up early gains Tuesday as bond yields slid, and the U.S. Treasury yield curve inverted further, signalling more concern about global economic growth. The yield curve tracks how much investors are willing to pay for bonds of different time horizons. In a healthy trading environment, longer-dated bonds would command higher rates, but on Tuesday 30-year yields slipped below those on three-month notes.
Monday’s rebound in stocks came after President Donald Trump said China signaled in a telephone call that it was ready to return to the negotiating tableand officials in Beijing called for a calm resolution. China’s foreign ministry has said though that it is “not aware of” any phone call between China and the U.S. though, and it’s not clear that talks will resume in September as planned.
A tweet from the usually well-informed editor of China’s state-owned Global Times, Hu Xijin, midday Tuesday also suggested China was in no hurry to reach a trade deal.
“I was surprised the market was up earlier today,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “We have no reason to believe there’s any new negotiations going on, and there’s no new positive news today.”
Frederick expects choppy markets from now until at least Sept. 1, when the next round of tariffs is slated to begin. “You can just expect there to be a lot of volatility driven by Twitter,” he told MarketWatch.
Han Tan, market analyst at FXTM, echoed that sense of wariness about Trump’s erratic policy-making by tweet, in a client note.
“Market nerves have been left raw, with the delicate sentiment prompting knee-jerk reactions to every nuance pertaining to the highly unpredictable U.S.-China trade impasse. Until there are clear signs of progress in U.S.-China trade negotiations, risk aversion will continue to dominate market sentiment, with safe-haven assets maintaining their appeal among investors,” Han wrote.
“Despite the seemingly hopeful commentary, investors are well aware that multiple rounds of trade talks have only led to the current dismal situation, whereby repeated tariff threats have become the norm,” he said.
Fears of a global economic slowdown also remain a factor. Data on Tuesday affirmed that Germany’s economy shrank in the second quarter as weaker exports dragged on growth.
In Tuesday’s U.S. economic data, the Case-Shiller home price index showed home prices rising nationally at 2.1% in June, down from a 2.4% gain the previous month.
Consumer confidence remained elevated, according to the Conference Board’s latest consumer confidence index reading, which fell slightly to 135.1 in August from a revised 135.8 in July. Economists polled by MarketWatch predicted the index would fall to 127.8.
Escalating trade tensions and tariff threats have kept stocks at a loss for the month. The Dow is down 4% in the month-to-date through Monday, while the S&P 500 is off 3.7% and the Nasdaq has pulled back 4.3%.
Which stocks were in focus?
Shares of Johnson & Johnson JNJ, +1.44% gained 1.4% Tuesday. A judge ruled Monday that the company must pay $572 million for contributing to an opioid-addiction crisis in Oklahoma, far less than the $1 billion many analysts had expected. Johnson & Johnson said it would appeal the judgment.
Shares of J.M. Smucker Co. SJM, -8.18% fell 9.2% Tuesday, after the food-products manufacturer reported second-quarter results that fell short of expectations, while lowering its outlook for fiscal 2020.
How did other markets trade?
The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, -0.69% fell 6.4 basis points to 1.485%, while that of the two-year yield TMUBMUSD02Y, -1.31%was down 2.5 basis points 1.522%.
Stocks in Asia closed Tuesday mostly higher, with the China CSI 300 000300, -0.37% rising 1.4% and Japan’s Nikkei 225 NIK, +0.11% adding 1%. Hong Kong’s Hang Seng index HSI, -0.14% , however, edged 0.1% lower. European stocks were up 0.5%, as measured by the Stoxx Europe 600 index SXXP, -0.33% .
In commodities markets, the price of crude oil CLV19, +1.17% rose 2.5% to about $54.96 per barrel, while gold prices GCZ19, -0.12% added 0.9% to about $1551 per ounce.