Dow ends 400 points lower as historic visit to Taiwan puts U.S. and China tensions back in focus

What drove stocks

U.S. stocks tumbled into the closing bell on Tuesday after Pelosi’s plane landed without incident in Taipei Tuesday night local time, or late morning in New York, in defiance of China.

Tom Essaye, founder of Sevens Report Research, said that Tuesday’s session “wasn’t a bad performance overall, but ‘not bad’ isn’t going to be good enough to push the S&P 500 to 4,200. We need actual good news and there wasn’t any on Tuesday. Not starting a war between the U.S. and China wasn’t enough,” Essaye told MarketWatch by phone.

Pelosi became the highest ranking elected U.S. official to visit the island in 25 years. Her trip comes as part of a visit abroad that has taken the speaker to Singapore, Malaysia, South Korea and Japan for talks on a variety of topics, including trade, COVID-19, climate change and security. It’s worth noting that a bevy of Congressional Republicans visited Taiwan last summer.

After denouncing the trip, Beijing announced plans to carry out military drills and missile tests in an area encircling Taiwan. Meanwhile, Taiwan’s government claimed that nearly two dozen Chinese warplanes entered its airspace on Tuesday, and also claimed that a cyberattack had been perpetrated against the website belonging to the Office of the President.

The tensions sparked initial demand for safe-haven assets, with gold prices rallying Tuesday. The 10-year Treasury note BX:TMUBMUSD10Y fell in early trade, but bounced back to rise around 13.5 basis points to 2.74%, its highest level in a week. Yields and debt prices move in opposite directions.

But the main action in Treasuries was seen at the short end of the curve on Tuesday, where the two-year yield climbed 16.8 basis points to 3.077%, according to Dow Jones Market Data, while the three-month Treasury bill yield increased by 15 basis points to 2.46%.

Fed speakers were also in focus Tuesday. San Francisco Fed President Mary Daly said the Fed is “nowhere near” finished with its fight against inflation, while Chicago Fed President Charles Evans said he hoped the Fed could raise rates at a slower pace later in the year, but that it would ultimately depend on the data. Neither Daly nor Evans has a vote on the Fed’s rate-setting committee this year.

Neil Dutta, head of economics at Renaissance Macro Research, said in an emailed note that the hawkish tone from the two Fed speakers was consistent with remarks made by Minneapolis Fed President Neel Kashkari and other Fed officials in recent days. While that helps explain the jump in short-term interest rates, which are the most sensitive to expectations surrounding the path of Fed rate hikes, it might not be great for stocks.

“This does not strike us as the Fed being close to pivoting,” he wrote. “The squawking is having the intended result with two year yields up 18bps now. Perhaps the Fed rhetoric caps the upside to equity multiples.”

An update on the state of the U.S. labor market showed job openings fell to 10.7 million in June from 11.3 million a month earlier. Openings have dropped three months in a row after peaking in the early spring at a record 11.9 million. The number of people who quit jobs in June, meanwhile, only fell slightly to 4.23 million, the Labor Department said Tuesday.

The highlight of this week’s economic data calendar arrives on Friday, when investors will receive an update on the state of the labor market for July. Essaye said that investors appear to be holding out hope that the upcoming economic data will confirm that both the labor market’s tightness, as well as high inflation, will start to moderate.

Single-stock movers

• Shares of Uber Technologies Inc. UBER finished 18.9% higher Tuesday after the ride-hailing and delivery services company swung to a second-quarter loss but reported a more than doubling in revenue that beat expectations by a wide margin and became cash-flow positive for the first time.
• Caterpillar Inc. CAT shares fell 5.8% after the construction and mining equipment maker reported second-quarter profit that beat expectations but sales that came up short, as higher pricing and sales volume were partially offset by unfavorable currency impacts.
• TD Bank Group TD said Tuesday it would buy investment bank Cowen Inc. COWN for $1.3 billion, or $39 a share, a premium of about 10% over its closing price of $35.49 a share on Monday and a purchase price multiple of 8.1 times Cowen’s estimated 2023 earnings. Cowen shares rose 8.4%, while TD shares declined 0.3%.
• Pinterest Inc. PINS late Monday missed expectations for earnings and guided for revenue lower than analysts expected in the current quarter, but shares were rallying as users stuck around and activist investor Elliott Management Corp. confirmed a previously reported investment in the company. Pinterest shares rose 11.6%.
• Shares of DuPont de Nemours Inc. DD fell 2.7% after the specialty materials and chemicals company reported second-quarter profit and sales that beat expectations but provided a downbeat third-quarter outlook, citing foreign currency headwinds and unplanned downtime at a Virginia site.
• JetBlue Airways Corp. JBLU fell 6.4% after the airline reported a larger loss than analysts had been expecting.
• Sabre Corp. SABR shares rose 9% after the online travel company posted a smaller-than-expected second-quarter loss and said it believes the travel recovery is on a long-term uptrend.
• Hotel operator Marriott International Inc. MAR beat estimates for the second quarter and offered upbeat guidance. Still, shares slid 0.8%.

Other assets

• The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was up 0.8%.
• The U.S. oil benchmark CL rose 53 cents, or 0.6%, to end at $94.42, while most-active gold futures GC00 climbed $7.90, or 0.1%, to settle at $1,789.70 an ounce, rising for a fifth day, the longest winning streak since April.
• Bitcoin BTCUSD rose 0.3% to trade near $23,070.
• The Stoxx Europe 600 XX:SXXP fell 0.3%, while London’s FTSE 100 UK:UKX saw a fractional loss.
• China’s benchmark Shanghai Composite CN:SHCOMP ended 2.3% lower, while the Hang Seng Index HK:HSI shed 2.4% in Hong Kong and Japan’s Nikkei 225 JP:NIK declined 1.4%.