S&P 500 Futures Edge Down as Investors Sell Bonds, Tech Stocks

U.S. stock futures ticked down as investors sold down government bonds and richly valued technology stocks that had powered higher in a low-yield environment.

Futures tied to the S&P 500 edged 0.3% lower, indicating that the broad market gauge could post a muted drop after the New York opening bell. Dow Jones Industrial Average futures slid 0.1%. Nasdaq-100 futures retreated 0.7%, suggesting that technology stocks could extend their decline.

In bond markets, the yield on the 10-year Treasury note rose to 1.767%—near its highest level in more than 14 months—from 1.721% Monday. Earlier this month, the yield closed at about 1.730%, its highest since January 2020. Yields rise when prices fall.

This year, investors have exited government bonds as the brightening economic outlook and concerns about higher inflation combined to sap demand for what are seen as the world’s safest assets. Some money managers are betting that the Federal Reserve will raise interest rates in 2023, despite the central bank pledging to keep monetary policy loose until the labor market has recovered and inflation stays above 2% for a period.

“You’ll continue to see the markets test that resolve,” said Hugh Gimber, a strategist at J.P. Morgan Asset Management. “This is basically a big economic experiment that we haven’t seen for many decades, which explains why economic uncertainty is more elevated today.”

Mr. Gimber said he is betting that Treasury yields will keep rising for the rest of the year. That doesn’t have to crimp appetite for stocks, he added. “So far, it seems pretty clear that markets are focused on this growth, inflation and policy trade off.”

The sharp rise in yields, which were as low as 0.915% at the start of the year, has curbed appetite for technology shares, many of which won’t generate large profits in the immediate future. Investors have instead started moving money into stocks that would benefit most from the economic rebound, such as energy, banks and airlines.

But that so-called reflation trade has also floundered in recent days on rising concern that elevated Covid-19 infection levels and problems with the vaccine rollout could hamper the global economic recovery. Biden administration officials have warned that the spread of new variants, an increase in travel and loosened restrictions could lead to a surge in cases and deaths.

“There are question marks about the interplay of the vaccine rollout: is it sufficient to offset the risk of another wave of Covid cases? This could put the reopening trade in jeopardy,” said Edward Park, chief investment officer at Brooks Macdonald. “It is more questionable whether things will be back to normal in summer as some were hoping.”

Investors are also trying to gauge the impact of President Biden’s planned multitrillion-dollar economic package, as well as the ramifications of higher taxes that may accompany the additional spending.

Money managers are continuing to watch for any further fallout from Archegos Capital Management’s liquidation of more than $30 billion in stocks in recent days. The hedge fund’s losses prompted banks that had been handling its trading to unwind positions, and warn that they too may incur some losses. Global bank shares tumbled on Monday.

Mitsubishi UFJ Securities Holdings Co. said Tuesday that it could post losses of about $300 million stemming from transactions with a U.S. client. The firm didn’t name the client. U.S.-listed shares declined 2.8% in premarket trading.

“Everyone’s trying to work out who the next hit is going to be, what is the next investment bank tied up in it,” said Charles Hepworth, an investment director at GAM Investments. “It doesn’t seem like it is systemic, so that has hopefully been contained and isn’t some kind of Lehman moment.”

Mr. Hepworth said he is also monitoring the surge in demand for digital collectibles, or nonfungible tokens, to determine whether investors and lenders are taking on too much risk. That could lead to volatility in the broader market.

“It is frothy and bubblicious and these things might not end well,” Mr. Hepworth said. At the same time, “these things can go on for some time as we have easy money conditions,” he cautioned.

Overseas, the pan-continental Stoxx Europe 600 advanced 0.4%.

Shares in Credit Suisse Group declined over 2.5%, extending its drop. It fell more than 13% in European trading Monday due to concerns over losses it may accrue due to its dealings with Archegos.

The Turkish lira fell 2.6% to 8.4399 per dollar, drawing closer to its all-time weakest level, after Turkey’s President Recep Tayyip Erdogan fired the deputy governor of the central bank. Mr. Erdogan ousted the head of the central bank in a surprise move earlier this month.

In Asia, most major benchmarks closed higher. South Korea’s Kospi rallied 1.1% and Hong Kong’s Hang Seng added 0.8%. China’s benchmark Shanghai Composite Index rose 0.6%.

S&P 500 Futures Edge Down as Investors Sell Bonds, Tech Stocks
Photo: brendan mcdermid/Reuters

Write to Caitlin Ostroff at [email protected]

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